As Congress tries to negotiate an infrastructure spending bill, one point of contention is $40 billion allocated to the Internal Revenue Service to increase enforcement of the tax laws. It is widely believed that the funding will pay for itself and more to help pay for the infrastructure costs. Not only that, it will reduce the “tax gap” — the difference between the tax that people owe and what they actually pay. But the funding proposal was dropped due to pushback from Republican politicians.
There are a number of reasons for Republican opposition. They see this as a backdoor tax increase due to overzealous auditors shaking down businesses. As a result, some may choose to pay the extra tax rather than spend the time and money to fight. Others believe that the IRS will use its broad investigatory powers to invade taxpayer privacy. Finally, tax collectors will have more power to forcibly take money and property from struggling taxpayers or from businesses that may want to use that money to invest in employees or expansion.
There is some merit to some of these talking points. Many may still remember the congressional hearings in the 1990s where aggrieved taxpayers testified about abusive actions from IRS staff. The testimony resulted in the passage of the IRS Restructuring and Reform Act of 1998 which limited IRS collection powers, created an oversight board, and, as the name implies, generally restructured the IRS operations to be more efficient and taxpayer friendly.
Some of the funding would likely be used to improve existing technology to improve service. Most IRS staff use slow and outdated IT equipment. This may be why some IRS offices only accept paper submissions and faxes instead of CDs or flash drives containing digital copies of documents. The improved technology can be used to process tax returns (and refunds) faster. It can also be used to detect suspiciously prepared tax returns while minimizing false positives.
The funding can also be used to hire representatives who can answer taxpayer questions about their accounts. In recent months, the hold times at the IRS were worse than usual. On most days, the IRS will not even take your call (despite the above mentioned callback feature) due to the backlog. The increased staff will reduce hold times and improve taxpayer satisfaction.
One convenient tool the IRS recently implemented was a callback feature to mitigate the inconvenience of long hold times. If you call the IRS and are expected to have a long hold time, the IRS will call you back when you are next in line to talk to a representative. If you don’t pick up the first time, then they call you back in 10 minutes. This was implemented by California’s Franchise Tax Board and the feature was welcomed as it minimized inconvenience to taxpayers.
Finally, the increased funding can be used to improve enforcement on the wealthy through audits, collections, or both. While closely monitoring the top 1% is likely to be favored by 99% of the population, the IRS will have to audit a large control group to determine whether a taxpayer belongs in the 1% (at least for tax purposes). Some may be underreporting their income not only to avoid taxes because they think that it will avoid IRS scrutiny. There has been some talk about requiring banks to report more transactions to the IRS in order to more efficiently determine whom to audit.
What does the private tax professional community think about this? One might think that they would be happy with a feeble IRS. But most are actually in favor of increasing funding as it will save them time and be beneficial for most of their clients. They agree that the increased funding would result in a net positive return on investment to the federal treasury. They also want funding to increase staff in order to eliminate long hold times. And they support hiring additional auditors so long as they are fair and reasonable to taxpayers.
Most agree that increasing funding to the IRS could reduce the tax gap that will help fund the infrastructure spending bill. But in order for the bill to appease at least some Republican members (or their constituents), it should be sold to them in a way that highlights improved taxpayer service. Technology upgrades will result in faster refund processing and more efficient detection of returns that need a second opinion from an auditor. The funding can be used to hire front line staff that can reduce hold times for taxpayers and professionals. While the hiring of additional auditors will result in pushback, both parties should take this opportunity to discuss how auditors can be fair to small business taxpayers who might not have the resources to prepare an adequate audit defense. If this can be accomplished, it can be the first step in reducing the tax gap without putting taxpayers in fear of an IRS reign of terror.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.