Tax Notes logo

Unintentionally Undermining Voluntary Compliance: Balancing Accountability and Budget

Posted on Nov. 17, 2015

In today’s post, we run an op-ed by Professor Danshera Cords, a Professor of Law at Albany Law School who is visiting this year at the University of Pittsburgh School of Law. The issue of adequate funding for the IRS is one that is getting significant attention. Last week, seven former commissioners wrote a letter to Congress protesting against inadequate IRS funding. Kelly Phillips Erb has a nice summary of the letter here at Forbes, where she notes how the former IRS chiefs decry $1.2 billion in IRS budget cuts over the past five years. At the same time, NTA Nina Olson, a longtime advocate of increased funding for the agency whom Professor Cords refers to in the post, was quoted in BNA last week as both discussing the need for adequate agency funding but also emphasizing the crucial oversight role that Congress plays. Freda, Olson Asking Valid Questions on IRS Spending, BNA Daily Tax Report, (11/4/15)[free link not available].That oversight must include requiring the agency to be accountable for its existing funding choices, some of which (like the hiring of outside counsel in the Microsoft audit) has brought negative attention to the way the IRS manages the resources it has at its disposal. To be sure, undue partisan emphasis obscures the legitimate oversight role that Congress must play and may in a worst case scenario contribute to weakening the public’s trust, a trust that helps separate the US from countries where the lack of respect for tax administration has contributed to financial distress.

In this post, Professor Cords, a prolific writer on issues relating to tax procedure and tax administration, weighs in on how she sees the dangers when accountability may bleed into partisan efforts to weaken the agency. Les

Procedurally Taxing Op-Ed

In spite all the things we can fault in our tax system, from complexity to lack of taxpayer service, one thing our tax system has is a relatively high level of voluntary tax compliance. One factor that researchers have repeatedly identified as important to tax compliance is faith in the fairness of the tax system.

When we consider tax administration it is imperative that the IRS be accountable, but it is also imperative that they have adequate resources to accomplish their objective of collecting taxes.  This balance is critical to ensuring that taxpayer and payers of tax know that they are always being treated fairly. Too often public discourse focuses only on the former and forgets the latter point. The failure to make this critical connection may leave taxpayers feeling like the were wronged and that any cure was a one time one thing, and the next taxpayer will surely receive even worse treatment. That is a valid concern when you consider the current state of the IRS budget.

It is easy to say that the IRS provides inadequate taxpayer service, but it is harder to accompany that statement with recommendations that will help make it better. The U.S. has a very high tax compliance rate (approximately 85.5% when last measured in 2006).

Nina E. Olson, the National Taxpayer Advocate (NTA) opened her 2014 annual report  to Congress with four points, including within her narrative criticisms accompanied by recommendations for remedies:

First, the budget environment of the last five years has brought about a devastating erosion of taxpayer service, harming taxpayers individually and collectively;

Second, the lack of effective administrative and congressional oversight, in conjunction with the failure to pass Taxpayer Rights legislation, has eroded taxpayer protections enacted 16 or more years ago;

Third, the combined effect of these trends is reshaping U.S. tax administration in ways that are not positive for future tax compliance or for public trust in the fairness of the tax system; and

Fourth, this downward slide can be addressed if Congress makes an investment in the IRS and holds it accountable for how it applies that investment.

These comments are well balanced because they are well thought out, they consider all the constituents, from taxpayers to tax collectors, from paid preparers to those whose lives depend on credits administered through the tax code. The NTA then takes the problems, attempts to balance the issues, resolve the problems and find a way in which the system can be made to work for all stakeholders in a practical way. More thinking of this nature is needed. Less finger pointing and blame would go a long way to fixing many of the long standing structural problems of tax administration.

Too often the public, the media, or politicians identify an issue on which the IRS may have erred and focuses solely on the error without regard to solutions. This is harmful in several ways. First, taxpayer morale is an important factor in voluntary tax compliance. Constant, repetitive reminders of IRS wrongdoing undermines taxpayer confidence in the tax system.

Second, focusing only on the problem without identifying workable solutions wastes increasingly scarce resources. Currently, the IRS is severely underfunded, working with fewer resources now than it was allocated in 2010. Often made suggestions, including elimination of the IRS are simply rhetoric and have little practical use, in that there must remain an agency who will collect the revenue necessary to the government functioning. Therefore, eradication of the tax system or elimination of the agency are not truly viable solutions in the short term.

Third, repeated, negative scrutiny of a particular area will demoralize workers. Workers who feel that they are unappreciated are less likely to go out of their way to be sure to get it right every time. Some trust of the part of tax enforcers is important as is trust on the part of taxpayers. As Ronald Reagan so famously said “trust, but verify” or “Doveryai, no Proveryai.”

Fourth, intense focus on smaller, less significant issues can distract from large, more important issues. For example, the issue of section 501(c)(4) applications that came to light over two years ago remains the subject of much debate. More than two years have elapsed since Lois Lerner famously disclosed the forthcoming report from the Treasury Inspector General for Tax Administration (TIGTA) that the Internal Revenue Service (IRS) had delayed rulings on certain applications for nonprofit status under Internal Revenue Code (IRC) section 501(c)(4).

That disclosure and the report would begin a series investigations, that were conducted by Congressional committees, the Treasury Inspector General for Tax Administrations, and and the Government Accountability Office, diverting tens of thousands of working hours from already thinly spread IRS workers, costing millions of taxpayer dollars from a bare bones IRS budget, which still not have reached any conclusion beyond the obvious conclusion that lower level staffers with minimal staffers should not be expected to make important policy judgments. Moreover, it is likely that if we take a nonpartisan step back from these events we would conclude that this is not the place where we want these decisions to be made at all.

Throughout the history of the IRS it has been plagued with allegations of abuse, favoritism, political misuse of power, and other wrongdoings. This history suggests that placing in the hands of the agency the power to make judgments regarding the right to nonprofit status of political organizations such as those created pursuant to IRC section 501(c)(4) is at best misguided and at worst is going to create allegations of substantial abuse of power.

Sidenote: This is simply an emblematic issue, selected because it has been stewing for so long, and shows so few sights of being resolved any time soon. I do not select it because of any personal attachment to the issue. It does nicely demonstrate how these issue can get out of hand: taxpayers have a personal stake in the organization they want to created to do public good, employees want to take pride in their jobs, activists want to have a job, the media often loves a good scandal, politicians have long found an IRS scandal as good an issue as any, and this can turn into a self-feeding frenzy.

Indeed, over the past two years of investigation, members of both political parties have claimed to have been victims of this abuse. The scandal has done great damage to public perception of the fairness of decision making within the IRS, a perception that is critical to the successful operation of our fiscal house.

Those who have been most seriously harmed are taxpayers. Taxpayers have been harmed as a result of the diversion of already inadequate resources, appropriated to operation of the IRS to provide adequate training, that these investigations have taken away from taxpayer services, and the resources needed to provide subsequent training to prevent a recurrence of this problem during this election cycle, and the harm that results from the reduced confidence that the media and political commentary have cause taxpayers to have in the tax system. Adequate funding, oversight, and training at the outset might have avoided the issue altogether.

Commissioner of Internal Revenue John A. Koskenin, a presidential appointee, has acknowledged that the way in which the applications were processed was improper. The IRS has moved to change the process by which it processes future applications. We are entering another busy elections cycle. The agency is funded at a level that is likely to be lower in real dollars than it was in 2010. We must allow the agency to move forward. The hearings must stop. What further pound of flesh can the investigators hope to get beyond the full attention of the media they have already received? The continued distraction of IRS employees properly completing their jobs? Worst of all, this continued tempest in a teapot over an investigation that has been performed repeatedly by the executive and legislative branches of government, at significant cost (never mind the same voices who decry the IRS supposed malfeasance also decry wasteful spending, increased debt, and the risk of government shutdown), drags down taxpayer morale. Going into this next campaign cycle we do not want to needlessly create the same situation by having done nothing more than having held pricey hearings, taxpayers and employees have a right to expect more from Congress and from Treasury.

The NTA has recommended a legislative fix to the tax exempt statute that would provide a safe harbor to clarify the activities in which a section 501(c)(4) organization may participate without disqualifying itself for engaging in campaign or lobbying activities. This legislative fix, if enacted would cure the problem and would eliminate all of the concerns associated with sections 501(c)(4) applications.

Reduced taxpayer morale is one thing this country can ill afford in a time of increased deficits, spending that approaches the debt ceiling, and a host of financial woes. The IRS must be held accountable for the actions that it takes. However, as effective a rhetorical tool as it may be to disparage the IRS, next time take a minute to think about the consequence of criticism. Can we do something to make it better? Is there are a recommendation we can make to improve taxpayer service? Could taxpayer administration be made more effective? As we come upon an election year, now is the time to recommend fully funding the IRS, productively holding the IRS accountable, and making taxpayer service effective. We all have a role to play in seeing this through. But we must remember lists of problems, where we have no solutions are not going to save, or even change, the world.

Copy RID