IRS Oversight Board Says Obama's IRS Budget Request Is Credible, Reasonable

• This report captures the Board's recommendations to Congress regarding the IRS Fiscal Year (FY) 2014 budget, a budget that is in line with the strategic goals and strategic foundations identified in the IRS Strategic Plan:

• Goal 1: Improve service to make voluntary compliance easier

• Goal 2: Enforce the law to ensure everyone meets their obligations to pay taxes

• Strategic Foundations: Invest for high performance in people and technology

The President is required to submit the Board's budget recommendation without revision to Congress along with the Administration's request. Additionally, the Government Performance and Results Act (GPRA) spells out the agency's responsibilities for linking its strategic, budget and performance plans and reporting to a comprehensive strategic process.

The IRS Oversight Board would also like to note that this year marks the 10th anniversary of the Board's budget recommendation special reports. Much has changed over the past decade when it comes to IRS programs and funding, including an equal emphasis on Taxpayer Services as well as enforcement and the removal of the IRS Business Systems Modernization (BSM) program from the Government Accountability Office's "High Risk" list. Nevertheless, some of the Board's concerns raised in that first budget report still ring true today, such as the need to provide reliable and adequate funding to the IRS so it may achieve a high level of customer service, to address non-compliance, and to enhance information technology systems.

The IRS' budget has been reduced since FY2010, with the biggest reductions coming in FY2013 through the sequestration. Although the IRS has achieved significant cost savings and efficiencies in recent years through substantial cuts in program support and IRS staffing, this path is no longer sustainable. While many factors impact IRS performance, such as the state of the economy, there are already indications that the reductions in IRS budgets funding through FY2012 are leading to a deterioration in performance. The amount of enforcement revenue collected, the level of service on the IRS toll-free assistance line, and measures of taxpayer satisfaction with the IRS and of IRS employee engagement are all down in FY2012 compared to where these results stood in FY2010. The effects on the cuts will likely be even more pronounced in FY2014.

The Board recommends that investments above the current FY2013 enacted level be made in Taxpayer Service, Enforcement, and Operations Support. The Board's budget does that and does not take funding from one category to bolster another.

 

FIGURE 1.

 

 

President's FY2014 IRS Budget Request as Supported by the IRS

 

Oversight Board

 

 

 

For every dollar invested in IRS services, enforcement, operations support, and Business Systems Modernization, there is an average $4-to-$1 return.

Approximately one-half of the one billion dollar increase the President seeks for the IRS would be financed by a program integrity cap adjustment. Treasury Secretary Jacob Lew has made a compelling case for this suite of enforcement programs and their average $6-to-$1 return on investment when fully realized. The Board believes these initiatives could play an important role in closing the tax gap while producing revenues to reduce the deficit and creating funding for other programs that are critical to our nation.

IRS Budget Challenges

The IRS confronts a number of formidable budgetary challenges. Funding uncertainty and budget cuts loom largest and present the highest risks to the IRS and our nation's tax administration system. The inability to pass federal budgets for the past several years has forced Congress and the Administration to increasingly rely on Continuing Resolutions (CR) to avoid a full or partial federal government shutdown, but often at a lower, or stagnant funding level.

Today, the IRS is operating under a CR, plus sequestration rules, that fund the agency at just under $11.2 billion, well below both the President's and the Board's FY2013 recommendations. This level is also more than $600 million less than the FY2012 level, and almost $1 billion less than FY2010.

Together, these budget cuts have forced the IRS to find major cost efficiencies and implement significant spending cuts. This has led to dramatic curtailments in training, travel, office space and outside contracts. The IRS has also been forced to significantly reduce the size of its workforce. In FY2012, the agency offered buyouts to 7,000 of its employees, with more than 1,200 accepting. The IRS also instituted an "exception-only" hiring freeze leaving many positions lost to attrition unfilled.

 

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FIGURE 2.

 

 

IRS Funding History, FY2002-2014

 

 

 

All told, approximately 8,000 full-time IRS positions have been lost since 2010, with about 5,000 coming from front-line enforcement personnel. In 2012, the IRS workforce (as measured in average full-time equivalent positions realized, or FTE) stood at just under 90,300; its lowest level in more than a decade. That number could go even lower given the large pool of IRS employees now eligible to retire.

The immediate effects of absorbing these budget cuts have been most apparent in Taxpayer Services, especially during the past two filing seasons when toll-free telephone Level of Service (LOS) hovered around 70 percent -- far below the Board's and IRS' desired level of 80 percent. Many IRS Taxpayer Assistance Centers are also understaffed and offer reduced hours and limited tax preparation services.

Stagnant funding provided through the CRs was only the beginning of the IRS' funding shortfalls. Today, the IRS' budget has been reduced by a total of $618 million from the $11.8 billion it would have received under the FY2013 Continuing Resolution with $594.5 million coming from the sequestration and $24 million in rescission cuts.

 

FIGURE 3.

 

 

Number of Full-Time Equivalents, FY2001-2014

 

 

 

The resulting $11.198 billion budget is $1.6 billion less than the President's FY2013 budget request. This also marks the third consecutive year that the IRS' annual appropriation has declined. Since FY2010, it has seen reductions to its appropriated funding totaling almost $1 billion.

To meet the mandatory spending cuts for FY2013 under sequestration, the IRS plans to furlough all employees for five to seven specific days beginning in late May until the end of the fiscal year. All IRS operations will be closed on these uniform dates, including toll-free operations and Taxpayer Assistance Centers.

Although the furloughs will occur after the conclusion of the 2013 filing season, legitimate concerns have been expressed about the sequestration's potential effect on the IRS' long-term performance, especially if more budget cuts continue in the out-years. The Board notes there are already signs of declining performance in key areas, as indicated in Figure 4. A continuing budget sequestration will reduce the enforcement revenue the IRS collects. The effects from the budget cuts will likely become more apparent as time goes on, with more significant reductions in revenues and performance beginning to show in 2014.

The IRS has already had to adjust its FY2013 Operating Plan to reflect the sequestration's drain on funding. For example, to apply the employee furloughs evenly across the organization, the IRS proposed to transfer up to $75 million from its Enforcement Appropriation to its Taxpayer Services and Operations Support Appropriations.

The Department of the Treasury asked the Board to review and comment on the IRS Operating Plan. We believe the plan will most likely result in significantly reduced performance results and the erosion of taxpayer service and compliance programs in FY2013 and future years. It should also be noted that a reduction of this size and scope will most likely impact voluntary compliance and IRS efforts to close the tax gap.

The Board is also concerned that these drastic budget cuts and subsequent staffing reductions come at a time that the IRS is faced with increased responsibilities and workload. For example, administering the tax portions of the ACA presents large challenges in both taxpayer service and enforcement. In FY2014, the IRS must also leverage the merchant card and stock basis matching initiatives and the Foreign Account Tax Compliance Act, all of which will require increased funding and staff. In addition, stolen identity refund fraud continues to be a major problem for tax administration.

Given all these factors, the Oversight Board believes that this is not the time to make shortsighted budget cuts that can erode the many important gains the IRS has achieved since the enactment of RRA 98, including better taxpayer service, an overall increase in enforcement revenue, and success in modernizing major information systems. It is important to restore continuity and make the needed investments in three key areas: (1) Taxpayer Services; (2) Enforcement; and (3) Operations Support.

 

FIGURE 4.

 

 

Recent Indicators of Declining Performance in Key

 

Measures, FY2009-2012

 

 

 

It should be noted that the President's FY2014 budget request does not reflect the $594 million (five percent) sequestration and $24 million (0.2 percent) rescission cuts that the IRS had to make in FY2013. At present, the IRS does not know the impact of sequestration in FY2014. The Board assumes no sequestration will be in effect in FY2014.

Nonetheless, the Board believes that the President's FY2014 Budget Request is credible and reasonable. It is aligned with and supports IRS Strategic Plan goals and objectives and Treasury Department priority goals. Moreover, it makes up for much of the loss in resources and FTE over the past few years when the IRS was funded at FY2012 enacted levels.

• The President's 2014 budget further requires that the IRS achieve efficiencies and savings of $254.8 million from the following:

• Targeted Personnel $77.8 million

• Space Optimization Savings $76.7 million

• Reduce IT Infrastructure $57.5 million

• Business System Modernization (BSM) $30 million

• Implement Human Capital Efficiencies $7.9 million

• Increase e-File Savings $5 million

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FIGURE 5.

 

 

FY2014 IRS Oversight Board Initial Request and

 

President's Budget Request for Initiatives

 

 

 

The Board appreciates that the FY2014 budget request is but the beginning of a long process that can be affected by a number of other factors, including the larger continuing debate over deficit reduction. However, that should not prevent us from beginning a productive dialogue about how to fund the IRS so it may achieve its mission. Following are more detailed discussions on various budget items.

Providing taxpayers with quality taxpayer service is an essential part of the IRS' balanced mission and delivers on its strategic goal: "Improve Service to Make Voluntary Compliance Easier." Taxpayers need assistance to navigate and understand a highly complex tax code and file a correct return. Getting it right the first time benefits both taxpayers and the IRS as it helps prevent inadvertent non-compliance and costly and burdensome post-filing actions, such as audits and penalties. Figure 6 shows the dramatic decline in telephone assistance and practitioner priority service levels over the past decade. In addition to raising its telephone LOS to acceptable levels, FY2014 also presents a major taxpayer service, outreach and taxpayer education challenge for the IRS as major tax-related portions of the ACA take effect, including those related to health insurance exchanges.

What the Board Recommends

The Board strongly supports the President's request of $2.41 billion for Taxpayer Services in FY2014. This request includes an additional $177 million to improve taxpayer service and meet increased demand. The Board believes that this funding level is necessary for the IRS to reach the LOS goal of 79 percent stated in the budget request. Otherwise, providing an acceptable LOS will continue to be a challenge for the IRS; one that the Board hopes the Congress will help the IRS overcome for the sake of all taxpayers.

 

FIGURE 6.

 

 

Toll Free and Preparer Priority Lines: Level of Service

 

 

 

Source: IRS Enforcement and Service Results report and IRS reports to Board Operations Committee

Enforcement is a top priority in the IRS Strategic Plan. In recent years, the IRS has made some significant achievements and advancements in enforcement, such as the successful Offshore Voluntary Disclosure Programs that not only collected $5 billion in back taxes, penalties and interest but sent a strong deterrence message to those considering illegally hiding income and assets in overseas tax havens. Last year, the IRS managed to maintain and deliver most of its key enforcement priorities, such as audits in the upper-income brackets. However, the IRS still faces a number of enforcement challenges in FY2014. The IRS must ramp up its efforts to address offshore non-compliance and abusive tax avoidance schemes and expand its audit coverage of high-wealth individuals and enterprises. On a broad scale it must also increase the overall audit and collection coverage for all taxpayers.

The Board and other observers from both the private and public sectors also question why the approximate $4-to-$1 return on investment (ROI) for IRS enforcement activities is not recognized in the budgetary process. These investments pay for themselves many times over. They can deter noncompliance, provide greater revenues to fund essential government services, and help reduce the deficit and national debt.

What the Board Recommends

The Board strongly supports the President's request for $5.67 billion for Enforcement activities in FY2014. The President's budget request also includes a number of high ROI tax enforcement and compliance initiatives which would receive above-base funding by a program integrity cap adjustment through 2018, with additional cap adjustments to sustain these revenue-producing initiatives from FY2018 through FY2023. The $407 million in IRS program integrity cap adjustment funding for FY2014 will generate more than $1.6 billion in additional annual enforcement revenue, achieving a potential ROI of $6.0-to-$1.0 in FY2016. Absent a cap adjustment, these initiatives would go unfunded. Table 1 on page 14 identifies the ROI on each enforcement initiative.

                                    TABLE 1.

OPERATIONS SUPPORT AND BUSINESS SYSTEMS MODERNIZATION

The successful launch of the Customer Account Data Engine (CADE) 2 was a major milestone in the IRS' technology modernization program. It will allow for the retirement of the antiquated legacy system and enable the IRS to move from a weekly to a daily processing cycle for individual accounts, which conveys numerous benefits. In another development, Modernized e-File systems now accept both individual and corporate returns and processed over 115 million returns last year.

However, the Board wants to be sure that a sense of complacency does not set in and that funding for future releases of CADE and other IT programs is not reduced or delayed. The risk of complacency is not limited to technology.

The IRS' employees are its greatest asset but are placed at heightened risk during these uncertain budget times. An engaged workforce is essential if the IRS is to function at a high level and deliver on its mission and strategic goals. Last year, the IRS ranked third amongst the 15 largest federal agencies and departments on an employee engagement scale. However, the Board is concerned that ranking could slip, especially if further staffing reductions take place and the exception-only hiring freeze continues.

What the Board Recommends

The Board strongly supports the President's request for $4.48 billion in Operations Support and $300.8 billion in Business Systems Modernization activities in FY2014.

The President's budget proposal would increase staffing to support a number of enforcement and taxpayer service initiatives previously described. The Board believes that is a wise investment in human capital and could provide the IRS workforce with new career opportunities that have been unavailable for the past two years. However, the President's budget also assumes that the IRS will continue to seek efficiencies in personnel and non-labor costs, including training. It is not clear whether the exception-only hiring freeze will continue in programs outside of those marked for increased staffing.

                           Appendices

                                  APPENDIX B.