Friday, January 10, 2014

Starve The IRS Beast, Punish The Average Taxpayer

Janet Novack for Forbes writes: Some folks cheer when the Internal Revenue Service’s budget shrinks.  Last summer, for example, a House subcommittee approved a 24% IRS budget cut,  in part as punishment for the agency’s ham-handed handling of tax-exempt applications from Tea Party groups.
But before you join the starve-the-IRS-beast cause, keep this in mind:  while recent budget cuts may have chipped away at the IRS’  collection and enforcement activities, they’ve also hastened a dramatic decline in taxpayer service.

On Wednesday, the IRS released annual tablesshowing it audited just 0.96% of individual tax returns in fiscal 2013 ended Sept. 30, the lowest since 2005, and that the audit rate for those earning $1 million plus, (a particular focus in recent years), fell from 12.48% in 2011 to 10.85% in 2013. Buried on the last of nine pages of numbers was the change most likely to affect the average law-abiding Jane Taxpayer: just 60.5% of taxpayers who called the IRS’ toll-free assistance line got through to a human being last year, down from 74% in 2010 and 87% in 2004.
In her 2013 Annual Report to Congress released today, National Taxpayer Advocate Nina E. Olson offered additional indicators of collapsing service and named IRS budget cuts the second biggest problem facing taxpayers, both because of substandard service and because, she contends (and studies she has commissioned seem to support), rotten service may lead to more tax noncompliance. That, in turn, shifts more of the burden of paying for government to the still honest folks. (Olson’s pick for the biggest problem of 2013 is the IRS’ failure to set out a clear Taxpayer Bill of Rights and use it as a guide for evaluation of its operations and initiatives.)
Among the gruesome service details in Olson’s report: those callers who did manage to get through to a person at the IRS in 2013 first had to wait on hold an average of 17.6 minutes, up from 10.8 minutes in 2010 and 2.6 minutes in 2004.
Just as bad has been the deterioration in the IRS’ handling of the millions of pieces of correspondence it receives each year. This is a crucial function because the IRS conducts 76% of all individual audits by mail and sends out millions of additional computer generated notices a year telling taxpayers that they appear to have made some mathematical mistake or missed some bit of income reported on a 1099 or W-2. It also conducts most collection activity by mail.  When taxpayers respond to these scary IRS missives, say with documents showing they really made the charitable contributions they claimed, or that those big bogus refunds went to identity thieves, not to them, the IRS aims to deal with their responses within what it considers a  reasonable period (usually 45 days) and brands correspondence “over-age” when it hasn’t met that deadline.   At the end of 2013, the IRS had an inventory of 1.1 million letters, 53% of them over-age, up from 606,029 letters, 28% of them over-age, at the end of fiscal 2010.
And get this: the 1.1 million backlog was before  October’s 16-day federal shutdown, during which the agency received 400,000 additional pieces of correspondence, putting the IRS and taxpayers with IRS problems even further behind the eight-ball.
The 2010 budget represented a recent high water funding mark for the IRS, as the Obama Administration and a then Democratic-controlled Congress boosted its appropriations to $12.1 billion.  By 2013, including the effects of across-the-board “sequestration” cuts, its budget was 8% lower— down even more  when 6% inflation during that period and the IRS’ growing workload (including more tax returns filed and the implementation of ObamaCare) are considered. A workforce of 94,618 in 2010 had declined to  87,032 by 2013.
Particularly startling, the dollars spent on employee training dropped nearly 90%—from $172 million in 2010 to just $22 million in 2013. Sure, ridicule IRS training videos featuring Star Trek parodies and line dancing all you want. They display, to borrow Chris Christie’s Bridgegate description, “abject stupidity.” But a lack of training when the tax code is complex and constantly changing,  and taxpayers’ finances and even livelihoods are at stake, is plain crazy. Do you really want a poorly trained IRS auditor assessing tax you don’t owe or a know-nothing collector slapping an inappropriate levy on your bank account, mucking up the operation of your business or  your next mortgage payment? We give these people power,  the least we can do is train them to use it properly.
Poorly trained IRS workers may also provide more wrong answers about the tax law to citizens, although that’s admittedly a shrinking danger since the IRS is sharply curbing such answers, right or wrong. In December the IRS issued anotice to tax pros that in 2014 its phone representatives and the employees at hundreds of walk-in Taxpayer Assistance Centers (TACs) will no longer answer “complex” tax law questions, only “basic” ones,  and that the TACs will provide no tax advice at all after April 15th. “It is a sad state of affairs when the government writes tax laws as complex as ours and then is unable to answer any questions beyond ‘basic’ ones from baffled citizens who are doing their best to comply,’’ Olson said in a statement.
The IRS has also decided that TAC workers will no longer prepare tax returns, a service it had offered to low-income, elderly and disabled taxpayers. Instead, it will send everyone to volunteer tax preparers. Last year, TAC workers completed returns for 125,000 taxpayers during filing season, down from 223,000 in 2010.  The IRS rationale for curtailing tax advice and eliminating return prep is that with the spread of tax software and Web-based information it’s a logical place to cut in this era of shrinking budgets.
True,  www.irs.gov got 456 million visitors last year, up from 305 million in 2010. And Intuit INTU -0.52% Inc. whose TurboTax software dominates the market, offers free on-line service to taxpayers with simple returns, regardless of their income. Bob Meighan, vice president of TurboTax, estimates 90 million taxpayers qualify for the company’s free federal filing, although anyone with a Schedule C or C-EZ (Profit or Loss From Business) or Schedule D (Capital Gains and Losses), won’t qualify for either Intuit’s free service or one offered online by H&R Block HRB +0.87%.   TaxAct, a unit of Blucora BCOR +1.17%  (formerly InfoSpace), offers free federal filing for almost all forms, but it’s not as convenient as the product you must pay for.  Never mind that the old, poor and disabled folks who used to walk into an IRS office and ask for help completing their tax returns aren’t necessarily comfortable or proficient filling in forms on-line.

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