«Testimony of The Honorable J. Russell George Treasury Inspector General for Tax Administration March 3, 2015 Washington, D.C. TESTIMONY OF THE HONORABLE ...»
HEARING BEFORE THE
COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON FINANCIAL SERVICES
AND GENERAL GOVERNMENT
UNITED STATES SENATE
“Review of the President’s Fiscal Year 2016 Funding
Request for the Department of the Treasury and the
Internal Revenue Service” Testimony of The Honorable J. Russell George Treasury Inspector General for Tax Administration March 3, 2015 Washington, D.C.
THE HONORABLE J. RUSSELL GEORGE
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATIONbefore the
COMMITTEE ON APPROPRIATIONS, SUBCOMMITTEE ON
FINANCIAL SERVICES AND GENERAL GOVERNMENT
UNITED STATES SENATE
The Treasury Inspector General for Tax Administration, also known as “TIGTA,” is statutorily mandated to provide independent audit and investigative services necessary to improve the economy, efficiency, and effectiveness of the IRS, including the IRS Chief Counsel and the IRS Oversight Board. TIGTA’s oversight activities are designed to identify high-risk systemic inefficiencies in IRS operations and to investigate exploited weaknesses in tax administration. TIGTA’s role is critical in that we provide the American taxpayer with assurance that the approximately 91,0002 IRS employees, who collected over $3.1 trillion in tax revenue, processed over 242 million tax returns and other forms, and issued $374 billion in tax refunds3 during FY 2014, perform their duties in an effective and efficient manner while minimizing the risks of waste, fraud, or abuse.
OVERVIEW OF THE IRS’S FY 2016 BUDGET REQUEST The IRS is the largest component of the Department of the Treasury and has primary responsibility for administering the Federal tax system. The IRS’s budget The Federal Government’s fiscal year begins on October 1 and ends on September 30.
Total IRS staffing as of January 24, 2015. Included in the total are approximately 19,000 seasonal and part-time employees.
IRS, Management’s Discussion & Analysis, Fiscal Year 2014, page 2.
request supports the Department of the Treasury’s Strategic Goal of fairly and effectively reforming and modernizing Federal financial management, accounting and tax systems and the Department of the Treasury Agency Priority Goal of increasing self-service and electronic service options for taxpayers.
The IRS Strategic Plan for FY 2014-2017 provides a central direction for the
agency and guides program and budget decisions. The IRS’s strategic goals are to:
1) deliver high quality and timely service to reduce taxpayer burden and encourage voluntary compliance, and 2) effectively enforce the law to ensure compliance with tax responsibilities and combat fraud. To achieve these goals, the proposed FY 2016 IRS budget requests appropriated resources of approximately $12.9 billion.4 The total appropriation amount is an increase of $2 billion, or approximately 18 percent more than the FY 2015 enacted level of approximately $10.9 billion. This increase is illustrated in Table 1. The budget request includes a net staffing increase of 9,245 Full-Time Equivalents (FTE)5 for a total of approximately 90,524 appropriated FTEs.
The three largest appropriation accounts are Taxpayer Services, Enforcement, and Operations Support. The Taxpayer Services account provides funding for programs that focus on helping taxpayers understand and meet their tax obligations, while the Enforcement account supports the IRS’s examination and collection efforts.
The Operations Support account provides funding for functions that are essential to the overall operation of the IRS, such as infrastructure and information services. Finally, the Business Systems Modernization account provides funding for the development of new tax administration systems and investments in electronic filing.
As shown in Table 1, the Operations Support budget request for FY 2016 increased by over 30 percent or $1.1 billion and 1,820 FTE compared to FY 2015. The
three largest components driving this increase are as follows:
$495 million (975 FTE) for Information Technology changes related to the Affordable Care Act and other requirements to sustain critical information technology infrastructure;
$118 million (164 FTE) for improved taxpayer service and return processing, including efforts to address the projected growth in demand for traditional taxpayer services as well as to improve taxpayer assistance;
$85 million (74 FTE) for consolidating and modernizing IRS facilities, including reducing office space to realize an estimated annual rent savings of $23 million.
REDUCTIONS IN THE IRS’S FY 2015 BUDGET
The IRS’s appropriated funding was reduced by $346 million over the last year, from $11.3 billion in the FY 2014 enacted budget to $10.9 billion in FY 2015. To address this, the IRS reduced planned spending in a variety of key areas for FY 2015.
The areas with the largest cuts are total personnel compensation ($142 million), equipment ($65 million), communication and utilities ($55 million), and operation and maintenance of equipment ($42 million). The IRS also reduced overall net spending on services by $40 million.6 Finally, the IRS had an exception-only hiring freeze in place during FY 2014 which also remains in place in FY 2015.
Even with these reductions, the IRS Commissioner testified on February 3, 20157 that the IRS still faces a significant budget shortfall for FY 2015. As a result, the IRS is planning for the possibility of a shutdown of IRS operations for two days later this fiscal year, which will involve furloughing employees on those days. The IRS Commissioner also testified that these budget cuts will have negative impacts on taxpayer service and enforcement. For example, the Commissioner stated the IRS will delay replacement of aging information technology systems, increasing the risk of downtime and negatively affecting taxpayer service. In addition, the Commissioner indicated reduced staffing will result in decreased audits and collection activities, as well as delays in customer service during the 2015 filing season.
The overall net reduction in services includes a decrease of $100.2 million in other services from non-federal sources and an increase of $60.3 million in advisory and assistance services.
7 Written Testimony of John A. Koskinen, Commissioner of the IRS, before the Senate Finance Committee, dated February 3, 2015.
CHALLENGES FACING THE IRSAchieving program efficiencies and cost savings is imperative, as the IRS must continue to carry out its mission with a significantly reduced budget. TIGTA reported that implementation of the mandated sequestration,8 coupled with a trend of lower budgets, reduced staffing, and the loss of supplementary funding for the implementation of the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the Affordable Care Act or ACA)9 affected the IRS’s ability to deliver its priority program areas, including customer service and enforcement activities.10 For example, the IRS’s toll-free Level of Service11 decreased from 68 percent in FY 2012 to 61 percent in FY 2013. As of February 14, 2015, more than 26 million taxpayers contacted the IRS during the 2015 Filing Season by calling various Accounts Management toll-free telephone assistance lines12 seeking help to understand the tax law and meet their tax obligations. The IRS answered more than 9.3 million calls through automated scripts and more than 2.6 million calls by an IRS assistor. The Average Speed of Answer for an IRS assistor-answered telephone call was 28 minutes.
As of February 14, 2015, the IRS reported a 43 percent Level of Service for calls answered by an assistor. In addition, as of February 14, 2015, the over-age correspondence inventory totaled more than 1.3 million.
Key examination and collection statistics also declined. Examinations of individual tax returns decreased approximately five percent from FY 2012 to FY 2013.
In addition, collection activities initiated by the IRS, such as liens, levies, and property seizures, decreased approximately 33 percent during the same period. Our analysis of select customer service and enforcement statistics indicates that the downward trend in these areas may continue.
For example, budget cuts have resulted in significant declines in the IRS
Sequestration involves automatic spending cuts of approximately $1 trillion across the Federal Government that took effect on March 1, 2013.
Pub. L. No. 111-148, 124 Stat. 119 (2010) (codified as amended in scattered sections of Internal Revenue Code and 42 U.S.C.), as amended by the Heath Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029.
TIGTA, Ref. No. 2014-10-025, Implementation of Fiscal Year 2013 Sequestration Budget Reductions (June 2014).
The primary measure of service to taxpayers. It is the relative success rate of taxpayers who call for live assistance on the IRS’s toll-free telephone lines.
The IRS refers to the suite of 29 telephone lines to which taxpayers can make calls as “Customer Account Services Toll-Free.” collection program.13 From FY 2010 to FY 2014, the budgets for the Automated Collection System (ACS)14 operations and Field Collection were reduced by over $269 million. ACS staffing has been reduced by 24 percent since FY 2011, and the number of revenue officers has decreased 24 percent since FY 2011. As a result, in FY 2014 revenue officers closed 34 percent fewer cases and collected $222 million less than in FY 2011. ACS contact representatives answered 25 percent fewer calls in FY 2014 than in FY 2011 and collected $224 million less in FY 2014 than in FY 2011.
At the same time the IRS is operating with a reduced budget, it continues to shoulder increased responsibilities as it implements and administers provisions of the Affordable Care Act. This filing season represents the first time taxpayers must report on their tax returns whether they and their dependents maintained minimum essential health care insurance coverage or face a tax penalty for not maintaining this coverage.
The IRS must also ensure that the more than six million individuals who purchased insurance from a Health Care Exchange15 accurately reconcile on their tax returns advance payments of the Premium Tax Credit (PTC)16 they may have received.
Since enactment of the Affordable Care Act, these responsibilities have required the IRS to develop new information technology, modify existing computer systems, and establish new or revised filing, reporting, and compliance processes and procedures.
The IRS’s FY 2016 budget request includes $490 million to fund 2,539 FTEs for continued efforts related to the implementation of ACA. The largest components of this increase are $306 million to implement information technology changes to deliver ACA tax credits; $101 million to improve taxpayer service and return processing; and $67 million to address the impact of new ACA statutory requirements.
In addition, the IRS continues to dedicate significant resources to detect and review potential identity theft tax returns as well as to assist victims. Resources have not been sufficient for the IRS to work identity theft cases dealing with refund fraud, which continues to be a concern. IRS employees who work the majority of identity theft TIGTA, Audit No. 201330013, Budget Cuts Resulted in Significant Declines in Key Resources and Unfavorable Trends in Collection Program Performance, report planned for April 2015.
The Automated Collection System consists of 15 call sites with contact representatives to engage taxpayers and their representatives on resolving unpaid tax debts. Field Collection consists of over 400 offices across the country through which revenue officers contact taxpayers in person to resolve tax debts and secure unfiled returns.
Exchanges are intended to allow eligible individuals to obtain health insurance, and all Exchanges, whether State-based or established and operated by the Federal government, are required to perform certain functions.
A refundable tax credit to assist individuals and families in purchasing health insurance coverage through an Affordable Insurance Exchange.
cases are telephone assistors who also respond to taxpayers’ calls to the IRS’s toll-free telephone lines. This has contributed to the IRS’s inability to timely resolve victims’ cases as well as the continued decline in its ability to respond to taxpayers’ written correspondence. The allocation of limited resources requires difficult decisions, with a focus on balancing taxpayer assistance on the toll-free telephone lines during the filing season with other various priority programs, such as identity theft and aged work.
For example, the IRS previously reallocated ACS staff, who attempt to collect taxes through telephone contact with taxpayers, to work the growing inventory of identity theft cases. The combination of fewer resources and the need to continue answering telephone calls has contributed to trends that have been unfavorable to several ACS business results over the past four years. Specifically, we determined that inventory is growing because new inventory is outpacing case closures; cases in inventory are aging because inventory is taking longer to close; revenue declined while more cases were closed as uncollectible; and fewer enforcement actions (liens and levies) were taken.17 During the past several years, the IRS has continued to take steps to more effectively detect and prevent the issuance of fraudulent refunds resulting from identity theft tax return filings. The IRS reported that in Filing Season 2013, its efforts prevented between $22 billion and $24 billion in identity theft tax refunds from being issued.18 This is a result of the IRS’s continued enhancement of filters used to detect tax returns with a high likelihood of involving identity theft at the time the returns are processed. For example, the IRS used 11 filters in Processing Year (PY) 2012 to identify tax returns with a high likelihood of involving identity theft, compared to 114 filters used in PY 2014.
The use of these filters assists the IRS in more effectively allocating its resources to address identity theft tax refund fraud.
The IRS has also taken steps to more effectively prevent the filing of identity theft tax returns by locking the tax accounts of deceased individuals to prevent others from filing a tax return using their name and Social Security Number. The IRS has locked approximately 26.3 million taxpayer accounts between January 2011 and December 31, 2014. In addition, the IRS issues an Identity Protection Personal Identification Number (IP PIN) to any taxpayer who is a confirmed victim of identity theft or who has reported to the IRS that he or she could be at risk of identity theft. Once the IRS confirms the identity of a victim or “at-risk” taxpayer, the IRS will issue the taxpayer TIGTA, Ref. No. 2014-30-080, Declining Resources Have Contributed to Unfavorable Trends in Several Key Automated Collection System Business Results (Sep. 2014).
IRS Identity Theft Taxonomy, dated September 15, 2014, page 1.
an IP PIN for use by the taxpayer when filing his or her tax return. The presence of a valid IP PIN on the tax return tells the IRS that the rightful taxpayer filed the tax return, thus reducing the need for the IRS to screen the tax return for potential identity theft.