United States: Mnuchin And Olson Agree—More People And A Different Approach For The IRS. Will Trump Listen?

Only days before President Trump's nominee for secretary of the treasury, Steven Mnuchin, testified in his confirmation hearing that the U.S. Internal Revenue Service (IRS) is underfunded and needs more manpower, the National Taxpayer Advocate's 2016 Report to Congress advocated for IRS budget increases and a friendlier enforcement approach. The first recommendation of National Taxpayer Advocate (NTA) Nina E. Olson's 2016 report to Congress, released on Jan. 10, 2017, is to increase the IRS's budget.

Since 2011, the agency's budget has been slashed from a height of almost $14 billion per year, down to less than $11 billion. These cuts have cost the IRS nearly 15,000 staff positions in five years. The IRS now operates with a staff of less than 80,000, smaller than at any time since 1980 and with roughly 50 percent fewer people than at its maximum staffing levels back in 1992.

In addition to concerns about understaffing, the NTA also described IRS struggles with "grossly outdated technology and infrastructure," including "two of the oldest information systems in the federal government," which are 56 years old and still used to track individual and business assessments, payments and other related items.

Prior to Mnuchin's comments, cuts to the IRS budget were expected to continue as early as April 2017, when its current budget authorization expires. However, as both Mnuchin and the NTA have pointed out, these budget cuts, corresponding decreases in staff, and ineffectual, outdated technology have been devastating to traditional tax enforcement. IRS headcount has tumbled roughly 30 percent in recent years, including among key enforcement staff, such as revenue officers, revenue agents and appeals officers:

Enforcement Staff 2011 2016 Change Percent change
Revenue Officers 4,402 3,072 -1,330 -30.2 percent
Revenue Agents 11,959 8,871 -3,088 -25.8 percent
Appeals Officers 1,129 739 -390 -34.5 percent

When enforcement staff positions are cut, the IRS can simply no longer review the same number of tax returns. It then misses opportunities not only to collect more from tax cheats through additional assessments, but also to correct taxpayers' good faith, but wrong, tax positions and increase compliance in future years.

IRS Databooks report that the IRS examined approximately 20 percent fewer returns in 2015 than in 2011, and reduced its examinations of large corporate returns by 30 percent despite increased filings. These declines resulted in $18 billion dollars less in proposed additional tax adjustments in 2015, a decrease of more than 40 percent from 2011 levels.

The NTA report charges the agency's obsolete computer systems with creating audit inefficiencies by falsely flagging returns as fraudulent 50 percent of the time. The NTA report also suggests that facing increasing budgetary pressure, the IRS has made "penny-wise, pound-foolish" decisions, such as reducing in-person appeals conferences and walk-in appointments at taxpayer assistance centers, failing to use behavioral science to encourage greater compliance, and conducting unnecessary audits, not only wasting time but also potentially decreasing those taxpayers' future compliance.

Private debt collection, reauthorized by Congress in 2015 and set to commence shortly, could ameliorate the effect of cuts on the collection side. But private debt collectors have been found to be less effective than IRS employees. And private debt collection will only prevent underreporting and underassessment of liabilities to the extent that it creates an additional deterrent.

Underreporting is the most important driver of the tax gap — the difference between the amount of tax owed and the amount of tax paid by the nation's taxpayers. It has been estimated at roughly $450 billion per year, roughly 90 percent of which is caused by both individuals and corporations underreporting their income.

Despite these considerable staffing and technological headwinds, the IRS's tax collections have never been more efficient, bringing in nearly $3 for every $1 spent by the entire agency (Mnuchin cited a $4 return at his confirmation hearing). And its enforcement arm may be even more effective: it appears to have brought in more than $7 for each dollar spent in 2015.

While Mnuchin's comment that President Trump understands that "where we add people, we make money," the NTA report urges "a change in IRS culture from enforcement-focused to service first" in addition to staffing increases. It criticizes the agency's allocation of twice as many dollars to enforcement as to taxpayer service, even though that allocation has remained constant over time.

It also questions whether better results would be obtained if the IRS viewed audits "first and foremost as educational opportunities" in which "the IRS can learn about the challenges taxpayers face in complying with the laws" and taxpayers may "learn that they can't get away with something they thought they could."

For those reasons, the NTA report recommends that Congress pair increased funding for the IRS with increased congressional scrutiny of how those dollars are spent, such as by holding hearings to discuss where the agency should spend additional resources and focusing on evidence-based approaches.

Mnuchin likewise mentioned that he was concerned about "customer service for the many hard-working Americans that are paying taxes" and recommended that the IRS "monitor customer satisfaction." Both the NTA and Mnuchin have also emphasized new technology as critical to the agency's customer service mission and its ability to collect more taxes.

Whether raising the IRS's budget with or without stricter oversight may appeal to President Trump remains to be seen. A 400 percent return on investment may be too good a deal for President Trump to pass up on, particularly where the NTA claims that there is "universal acknowledgement that the IRS needs more funding to do its job" based on the public forums, meetings with practitioners and in a nationwide survey it conducted in 2016.

Yet while the House Republican "Better Way" proposal calls for IRS to have a greater customer-service focus, echoing the NTA's approach, it also contemplates a "streamlined" structure and presumably lower budget.

President Trump has remained silent on his plan for the IRS, but his administration acted quickly after his inauguration to freeze most new hiring across the federal government until April 23, 2017, when he anticipates receiving a long-term plan from the Office of Management and Budget and Office of Personnel Management to reduce the size of the federal government workforce through attrition. President Trump is also expected to release his full budget around that time, although a shorter document outlining his budget priorities is expected in March.

In general, taxpayers should expect that if more dollars are allocated to the IRS — a prospect that remains very much in doubt — increases in enforcement will follow. The "friendliness" of that enforcement will likely remain in the eye of the beholder.

Originally published in Law360 on Feb. 2, 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.