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IRS = Paper Tiger?

The Kiplinger Letter of July 3, 2014 asked the question: “In the wake of IRS budget cuts, is the IRS turning into a Paper Tiger”?  The facts supporting the case were:

  • Funding levels have declined significantly since 2010;
  • Employee head count has decreased; and
  • Workload has been expanding, due to health care reform, complicated foreign account reporting rules, its effort to prevent fraudulent refunds from going to tax identity theft scammers, along with other responsibilities.

According to Kiplinger, examinations are plummeting, with “last year’s audit rate of 0.96% for individuals” being “the lowest since 2005”.  Put another way, “the service examined just one out of every 104 filed returns, and the individual audit rate for 2014 is expected to drop to 0.80%”.  Not bad for folks skirting the system, but not good for the folks that pay their taxes according to the rules.

On top of the agency’s decline in its ability to review tax returns, it has also cut back on important services relied upon by filers and preparers:

  • Long wait times are now the norm when calling the IRS;
  • Agents are directing callers to find information themselves in its publications or on its web-site, as opposed to actually answering questions;
  • Tax professionals who call the “priority line” can only get assistance on account issues for their clients;
  • Response to taxpayer correspondence has slowed so dramatically, to the extent where “many filers who sent in documentation” establishing “that a tax bill was erroneous” keep receiving bills;
  • Free walk-in tax preparation assistance is no longer offered at agency offices; and
  • The service has shut down the Disclosure Authorization and Electronic Acocunt Resolution services, two electronic applications used by tax professionals.

Kiplinger closed the 07/03/2014 letter with “don’t expect the IRS to come roaring back anytime soon” with “fiscal austerity” becoming “the norm for the near term as Congress keeps a tight grip on the purse strings”.  In a neat twist however, just two weeks prior to making the case for the IRS possibly becoming a Paper Tiger, in its June 20, 2014 Tax Letter, Kiplinger stated “the current stalemate” between Congress and the agency means “tax overhaul will not occur until 2018 at the earliest”.  Personally, I was surprised the Paper Tiger argument came after that of the statement concerning the delay in tax overhaul.  In my opinion, it would appear the funding cuts, the decline in services and the putting certain groups under the microscope at the IRS, along with all the other “issues” Congress has in front of it would have all lead to putting tax reform on the back burner.  I just found it unusual Kiplinger reported the demise of tax reform prior to the demise of the IRS as an institution.

Frankly, is anyone surprised by these Kiplinger comments?  Let’s face it, Congress had to cut IRS funding, as it did with many government agencies, due to the budget stalemate, sequester and all the other financial issues going on in Washington D.C.; however, did the IRS have to cut services so dramatically?  I do not think so!  I’ve said this before and I am going to say it again: WHENEVER a federal agency goes through a funding cut, it simply goes after the “low hanging fruit”, cut services, as opposed to seeking out ways to become more efficient.  It’s absurd, and it simply cannot happen in the business world because a business that cuts services essentially goes out of business, but when it comes to government, it’s ALWAYS cut the services offered.  However, getting back to the subject at hand, after the IRS is angering citizens and tax professionals with its “downsizing”, then it comes out that the service has been scrutinizing conservative group requests for tax exempt status.  With all this going on concerning the IRS, who could ever respect the agency any longer?

It turns out the IRS scrutiny began long before the decline in funds and loss of services at the institution.  Based on the timeline of events, it appears the scrutiny ball started rolling with President Obama’s statement in his 2010 State of the Union Address that the Supreme Court’s decision in the Citizens United case opened the floodgates for special interests. As the facts were laid out in the 2013 IRS Inspector General’s Report to Congress, in May of 2010, the IRS Exempt Organizations Division, headed by Lois Lerner, began a concerted effort to scrutinize conservative group leaning applications for tax exempt status.  Then a March 2012 letter to then IRS Commissioner Douglas Shulman, signed by seven Democratic Senators, including Chuck Schumer, Al Franken, Carl Levin and others, added fuel to the fire.  In this letter, the Senators urged “the IRS to take steps immediately to prevent abuse of the tax code by political groups”, among other things, which in my opinion, told folks at the IRS they were headed in the right direction.  When all the scrutiny issues came out in the Inspector General’s Report, instead of increasing funding for the agency to reinforce its services, the Congress began looking into the issues concerning the improper scrutiny.

Based on the Democratic Party’s support of big government and employees of the government wanting to support democratic issues that could have a direct impact on their employment, I understand how INDIVIDUAL employee actions could lean toward supporting democratic issues.  However, when it becomes a concerted effort of particular agancies, ESPECIALLY the IRS, which virtually every member of our society is responsible to, it stands to reason that the Congress would begin leaning on the agency.  The cuts in funding can be seen as being directly responsible for the IRS’s becoming a “Paper Tiger”, not having the funding to carry out its work.  However, I believe the issue of tax reform being put off until 2018 at the earliest could be more an issue of all the other things Congress has on its plate: Benghazi, Obamacare, the Veterans Administration, Immigration, and now the IRS strong handed actions, amongst a few, more than that of congressional funding.  It’s going to be VERY interesting where this all ends up.