April 24, 2014

Complicated Tax Code Creates Difficulties for IRS -- and Taxpayers

The national taxpayer advocate, who serves as ombudswoman for the Internal Revenue Service (IRS), released her annual report last week, saying budget reductions have “significantly hampered” the agency’s ability to provide top-quality service. While additional funding would undoubtedly help, an even better way to help taxpayers and collect revenue more effectively would be for Congress to eliminate many tax expenditures. 

Nina Olson’s report notes that IRS funding has decreased by nearly $1 billion, or 8 percent of its budget, since Fiscal Year 2010.

Her report says that shrinking budgets for the agency mean “fewer dollars available to fund all federal programs.” Restoring the lost funding, she said, would lead to more effective revenue collection and could help reduce the budget deficit.

The annual report came after a very tough year for the agency. The IRS became embroiled in controversy when it was revealed that it had applied extra scrutiny to some political advocacy groups that had applied for tax-exempt status. Olson’s office issued a special report on the matter mid-last year, saying that limited funding and resources has caused the agency to give limited consideration to taxpayer rights and proper tax administration.

The annual report stated that the IRS has had continued difficulty with customer service due to shrinking budgets and the complicated tax code. According to the report, the agency is able to answer only 61 percent of calls from people who want to speak to customer service, down from 87 percent a decade ago. Callers last year who did reach a customer service representative waited 18 minutes, on average, to do so.

The report added that such poor experiences, combined with the complexity of tax preparations and the tax code, are harmful to “tax morale”-- taxpayers’ attitudes towards government and perceptions of whether they are being treated fairly by the tax code. This influences voluntary taxpayer compliance. Deteriorating services can lead to a lower level of voluntary compliance, making it more difficult and expensive for the IRS to collect revenue.

Additionally, due to budget constraints the agency has replaced some customer service agents with automated-response systems in order to help respond to the high volume of calls they receive. But Olson notes that “as the tax code grows more complex, taxpayer issues become increasingly difficult and harder to resolve through automation.” In her Fiscal Year 2012 report, Olson noted that the largesse of the code imposes a “significant, even unconscionable” burden of compliance on taxpayers.

While the FY 2013 report concludes that more funding for the IRS is needed for it to better collect tax revenue and enforce tax provisions, a more permanent solution to help both the IRS and the country is to reform and simplify the tax code. This can be accomplished by eliminating the myriad of inefficient and wasteful tax expenditures that subsidize certain individuals, companies and industries. Both The Concord Coalition and Olson, in her FY 2012 report, have urged Congress to review all tax breaks and retain only the ones that provide significant public benefits.

A better tax code could improve tax collection, reduce the deficit and make it easier for taxpayers to prepare their returns. By doing all of this, comprehensive tax reform would also promote economic growth.