Oklahoma Bar Journal
The Internal Revenue Service: A Taxing Nightmare
By Shiny Rachel Mathew
Federal spending has exceeded federal revenue for over two decades, and this trend has grown exponentially in recent years.1 However, the federal budget is unlike a traditional household budget, and some economists have cautioned against taking drastic measures to curb spending because of the harmful impact it would have on the economy.2 Substantial spending cuts and significant tax increases could result in slowing the economy and thereby decreasing tax revenue, while also increasing federal spending on social programs to combat the self-inflicted harm caused by a downturn in employment across the nation.3 Meanwhile, the Internal Revenue Service (IRS) has been hemorrhaging funding and staff for over a decade as a result of legislators who have vilified the IRS to justify cutting its budget.4
Latest IRS reports reflect that nearly 84% of federal taxes are paid voluntarily and on time, leaving $441 billion uncollected. The difference between taxes owed by law and the amount actually paid to the IRS is known as the "tax gap.”5 Many models have been advanced as to the size of the tax gap, but it is estimated to be somewhere between $381 billion to $1 trillion annually.6 Most unpaid taxes result from individuals reporting less income than they earned, especially business and self-employment income. About 9% of the gap is a result of failing to file, and 11% is due to underpayment of taxes that were accurately reported, according to the Committee for a Responsible Federal Budget.7
Considering the government is in dire need of revenue, one might logically conclude that providing adequate funding to the arm of the government that collects the majority of revenue would be seen as beneficial. The IRS is actually one of the rare government agencies that generates a positive return on investment. For every 33 cents that are spent on funding the IRS, the IRS collects $100.8 However, many legislators appear to have chosen to ignore this seemingly basic logic and have continued to vote to slash the budget of the IRS to tally political points. The IRS has been on the receiving end for over a decade of funding cuts to the agency. As a result, the IRS has lost more than 25% of the agency’s enforcement personnel to collect on the unpaid taxes owed by taxpayers.9 Recent figures on outstanding unpaid taxes owed to the government are estimated by the current IRS commissioner to be nearly $1 trillion.10
LONG-TERM FUNDING CUTS HAVE HAD A NEGATIVE IMPACT ON THE EFFECTIVENESS OF THE IRS
Not only have IRS enforcement and collections dropped drastically due to the budget cuts, but the level of service and accessibility has dwindled to an all-time low. A recent National Taxpayer Advocate Objectives Report indicated the IRS is answering only one out of every 50 calls received from the public.11 Practitioners have also reported receiving a prerecorded message advising callers to hang up and try back again later without providing an option to wait on hold. This means, even for urgent matters such as seizure or levy action by the IRS, one may not be able to reach anyone at the IRS to lift a freeze on assets, even to purchase basic necessities like groceries. Worse still, numerous taxpayers have languished at the mercy of the IRS for their 2019 and 2020 tax returns yet to be processed, with millions waiting on their refund checks to be issued.
Our firm has represented clients before the IRS over the last two decades. In our experiences with the various divisions within the IRS, we have seen first-hand that IRS employees are mostly trying to manage as best as possible without basic resources to enable them to do their job well. For example, our firm negotiated a settlement for a client in one case where, even though the settlement was paid in full by the taxpayer, the IRS lien department had failed to release the tax liens, which was extremely detrimental to the taxpayer’s credit score. When we were finally able to speak to the right person in the IRS lien department, they advised they could not release the lien until they “saw in the system that the offer in compromise had been paid in full.” We proposed faxing them the official IRS documentation reflecting the full satisfaction of the offer in compromise but were told by an IRS agent “that was not the protocol,” and they would not accept the documentation. We then called the IRS agent who had approved the settlement and were told the system reflected that the offer in compromise had been accepted and paid in full, and the lien department should “see it in the system.” However, when we asked the agent to call the IRS lien department to have the lien released, the response was, “No, that’s not the protocol: They have to see it in the system.” In this case and, tragically, in many other instances, the current state of the IRS demonstrates the axiom: The left hand does not know what the right hand is doing.
As much sympathy as we have for the agents who are tasked with these responsibilities, it is nonetheless frustrating when IRS agents routinely take weeks to respond on a matter (if they respond at all) with no apparent consequences or discipline from their superiors. We have handled cases where we have followed up with revenue officers for months on end in an attempt to push a matter forward. Often, after providing a revenue officer with all the documents requested, only to have the revenue officer or another IRS agent request all the documents all over again because the IRS code requires documentation reviewed by IRS agents be from the most recent three months in time.
Similarly, we have found it often takes six months or more for a hearing date to be set on an appeal of action related to a levy or a lien. Furthermore, during the actual hearing itself, the appeals officers routinely take little to no action to correct matters that are noted as errors in the IRS system, such as a tax return showing as unfiled, even when it may be a return that is not required to be filed by the taxpayer or business. It is also very common for appeals officers to kick the case back to the collections division of the IRS without taking any substantive action towards reaching a judicious outcome during the appeal. Likewise, filing a petition to tax court typically means you may be set to appear on the tax court’s docket approximately two years from the filing of your petition.
FUNDING CUTS HAVE LED TO FEWER AUDITS OVERALL, BUT MORE AUDITS FOR LOW-INCOME TAXPAYERS
The lack of funding at the IRS has also disastrously affected the examination/audit division of the IRS. With fewer people working within the examination division of the IRS, the share of individual income tax returns audited fell by 46%, and the share of corporate income tax returns it examined fell by 37% between 2010 and 2018, according to the Congressional Budget Office.12 The IRS has had fewer auditors during this period than at any time since World War II, and this tax shortfall cost the United States 3% of gross domestic product per year.13
Furthermore, recent reports on the trends in audit practices at the IRS have found an inequity in the treatment of taxpayers by the IRS that appears to be an unfortunate side effect of the funding cuts. An analysis of IRS audits found that, statistically, the IRS was less likely to audit a household with a gross income of over $1 million per year or a business with a gross revenue of over $20 million per year.14 Analysts surmise that many IRS officials believe they lack qualified enforcement staff and funding to successfully audit wealthy taxpayers and sophisticated corporations that may be exploiting the tax system and not paying what they owe. Audit levels of large corporations were at approximately 93% 10 years ago, while today’s figures find that only about 38% are audited.15
Dorothy A. Brown, a tax-law professor at Emory University in Atlanta, provides a glaring and damning examination of the IRS’s audit practices:
Without increased funding, the IRS will continue targeting low-income taxpayers for audits, particularly those claiming the earned-income tax credit. The EITC is a wage subsidy available to low-income workers. The typical EITC recipient makes less than $20,000 annually …
Moreover, while almost half of all EITC-eligible filers are white, an analysis by ProPublica found that the counties with the highest audit rates were ‘poor, rural, mostly African American and in the South.’
Increasing the frequency with which the poorest Americans are audited, while not similarly increasing the rate of audits among the more affluent, serves to exacerbate America’s racial and class inequities …
The IRS argues that EITC claimants are audited frequently because the audits are cheap to conduct, can be done by mail, and do not require a lot of IRS personnel time. Audits of wealthy taxpayers, by comparison, involve hand-to-hand combat with the best lawyers the wealthy can buy. It is simply easier for the IRS to go after the most vulnerable among us …16
Simply put, it appears from statistics the IRS may be targeting those who are less likely to hire representation to defend them.
OTHER FACTORS HAVE ALSO AFFECTED STAFFING AND RESOURCES
Unfortunately, the challenges of hiring adequate personnel for the IRS are not solely limited to funding constraints. Rather, the lack of funding exacerbates the hiring challenges of an employer who faces difficulty overcoming its lack of appeal to prospective employees. For example, an IRS revenue officer is a local agent tasked with the responsibility of collecting on outstanding unpaid taxes by taxpayers. These jobs can be thankless and dangerous at times. IRS agents have received death threats and other menacing threats of harm. Revenue officers routinely give pseudonyms when dealing with the public rather than providing taxpayers with their real names to prevent taxpayers from finding and taking action against them.
The anemic state of the IRS due to funding cuts has been further compounded by a disruption and near-complete halt to operations as a result of COVID-19, as well as the IRS being tasked with various responsibilities related to approving federal funds for lending, such as the PPP loan offered by pandemic-related legislation. However, COVID-19 only served to further exploit the painful reality experienced by those who have been working with the IRS over the past decade. The level of service provided inside and outside the IRS has been and continues to be lacking.
INCREASED FUNDING FOR THE IRS IS A SMART INVESTMENT
It’s easy to avoid the topic of funding the IRS by weaving the need for tax reform into the discussion. While there is room for thoughtful discussion over the most beneficial or effective taxing theories, tax rates and utilization of tax dollars, as well as debates to be had about the inefficiencies, redundancies and inconsistencies within government programs, statistics show that providing needed funding to the IRS would likely result in a good return on investment. A report from the Congressional Budget Office suggests the IRS could collect billions of dollars in additional revenue for each dollar invested in the IRS.17
President Biden has proposed an $80 billion funding boost for the IRS over the next decade, a major expansion of the tax agency that would double its enforcement staffing and give it new tools to combat tax dodging by the wealthiest Americans.18 IRS officials have said they need a multiyear commitment from Congress so they can hire and train enforcement staff and ramp up audits with less risk of lawmakers stopping such an initiative midway through. The money would let the IRS increase its enforcement staff by about 15% a year.19 The proposed enforcement provision would also include much more rigorous financial reporting to help crackdown on tax evasion and could yield as much as $700 billion over 10 years.20
As practitioners, although we may benefit from the disarray at the IRS driving the public’s need for professional representation, we should genuinely wish taxpayers could be better served within the system. We cannot afford to continue ignoring the desperate state of the IRS. Providing substantial funding to this very important agency of the government will help us out of this financial nightmare that has taxed us all.
ABOUT THE AUTHOR
Shiny Rachel Mathew is a partner at Polston Tax Resolution & Accounting. She was an accountant before receiving her J.D. from the OCU School of Law in 2008. She is the host of the Tea & Taxes OBA CLE Series, an Oklahoma Bar Foundation Trustee and previously served as chair of the Taxation Law Section.
- “The 2021 Long-Term Budget Outlook.” Congressional Budget Office. March 2021. Retrieved from www.cbo.gov/publication/57038.
- Ross, Sean. “What Are the Pros and Cons of a Balanced Budget?” Investopedia. Aug. 28, 2021. Retrieved from www.investopedia.com/ask/answers/042415/what-are-pros-and-cons-operating-balancedbudget.asp.
- Bur, Jessie. “IRS Funding has become a ‘self-fulfilling prophecy.’” Federal Times. July 14, 2021. Retrieved from www.federaltimes.com/management/budget/2021/07/14/the-irs-is- stuck-in-a-self-fulfilling-prophecy-of-congressional-funding.
- The Tax Gap. IRS.gov. Oct. 21, 2020. Retrieved from www.irs.gov/newsroom/the- tax-gap.
- Lobosco, Katie. “How much money could Biden raise for infrastructure through tougher IRS enforcement? It's not clear.” CNN.com. July 5, 2021. Retrieved from http://lite.cnn.com/en/article/h_f764971ab5f17ed72e05c410d22d424f.
- IRS Data Book: Oct. 1, 2019, to Sept. 30, 2020. Retrieved from www.irs.gov/pub/irs-pdf/p55b.pdf.
- Lobosco, supra, n. 7.
- “National Taxpayer Advocate Objectives Report to Congress FY 2021.” Retrieved from www.taxpayeradvocate.irs.gov/reports/2021-objectives-report-to-congress/full-report.
- “Trends in the Internal Revenue Service’s Funding and Enforcement.” July 2020. Congressional Budget Office. Retrieved from www.cbo.gov/publication/56467.
- Picchi, Aimee. “Your chance of getting audited by the IRS is lower than ever.” cbsnews.com. Jan. 7, 2020. Retrieved from www.cbsnews.com/news/irs-audit-rate-lowest-in-at-least-a-decade.
- Brown, Dorothy A. “The IRS is Targeting the Poorest Americans.” The Atlantic. July 27, 2021. Retrieved from www.theatlantic.com/ideas/archive/2021/07/how-race-plays-tax-policing/619570.
- Trends in the Internal Revenue Service’s Funding and Enforcement, supra, n. 12.
- Rubin, Richard. “Biden to Seek $80 Billion to Bolster IRS, Tax Enforcement.” The Wall Street Journal. April 27, 2021. Retrieved from www.wsj.com/articles/biden-to-seek-80-billion- to-bolster-irs-tax-enforcement-11619539465.
Originally published in the Oklahoma Bar Journal – OBJ 92 Vol 9 (November 2021)