Shortchanging IRS budget hurts taxpayers, report says

By ALAN FRAM

Associated Press

WASHINGTON — Congress is damaging the Internal Revenue Service by shortchanging its budget, making it harder for the agency to help taxpayers, detect fraud and bolster revenue collection even as budget deficits surge, a government watchdog said Wednesday.

“The imbalance between its workload and its resources is becoming unmanageable,” Nina E. Olson, the national taxpayer advocate, wrote in her annual report on the IRS.

Olson, an independent watchdog within the agency, wrote that agency computers set aside 1.1 million tax returns seeking refunds last year for examination for possible fraud, a 72 percent increase from 2010.

Responding to that and similar problems, the IRS relies increasingly on software to detect bogus returns. But these computer programs make mistakes of their own and limit personal contact the agency has with taxpayers, and one result has been an erosion of the rights of people who have disputes with the IRS, the report said.

“The most serious problems facing U.S. taxpayers is the combination of the IRS’s expanding workload and the limited resources available to it,” Olson wrote.

Her report came days after the IRS said individuals and companies underpaid their taxes in 2006, the most recent year available, by $385 billion after audits and other enforcement efforts. In recent years, federal deficits have exceeded $1 trillion annually.

The agency collected about $2.3 trillion last year.

Its budget this year is $11.8 billion, $300 million below last year and $1.5 billion less than requested by President Barack Obama.

“The IRS is effectively the accounts receivable department of the federal government,” Olson wrote, adding later, “If the federal government were a private company, its management would fund the accounts receivable department at a level that it believed would maximize the company’s bottom line.”

Rep. Charles Boustany Jr., R-La., a top member of the tax-writing House Ways and Means Committee, said the report highlighted that the tax system “has grown more complex and confusing over the years, reaffirming the need for comprehensive tax reform” — a top Republican priority. He made no mention of increasing the IRS budget.

IRS spokeswoman Michelle Eldridge said to combat burgeoning cases of fraud, the IRS uses congressionally approved compliance programs that are constantly audited to make sure people’s rights are protected.

“While fewer dollars in a tight budget environment impacts elements of taxpayer service, it does nothing to erode our protection of taxpayers,” she said.

By pointing her finger at the IRS budget, Olson was highlighting a politically sensitive issue. Especially in times of huge budget shortfalls, many lawmakers have little interest in being generous to the widely unpopular agency, which processes 141 million individual tax returns annually, including almost 120 million requests for refunds.

Obama said his IRS budget request would improve tax collections and enhance service, but he was unable to win over lawmakers.

“Like families across the country, the IRS will have to do more with less,” Rep. Jo Ann Emerson, R-Mo., who heads the House Appropriations subcommittee that controls the agency’s budget, said last fall.

The report blamed growing fraud on people who submit multiple false returns via electronic filing, and the growth of refundable tax credits for purchases of first homes, college costs and other expenses. Refundable credits can produce cash payments to people owing no taxes.

Olson wrote that the IRS handled more than 226,000 cases of identity fraud in 2011, a 20 percent increase over 2010. Thieves often request refunds by using the Social Security number of a person they claim is a relative, frequently filing early before the actual taxpayer submits a return.

“You want to make sure you’re not abusing the taxpayers by letting dollars go out the door,” Olson said in an interview of efforts to stop cheaters and collect owed revenue. Otherwise, she said, “taxpayers are going to get disgusted” and lose faith in the tax system.

But the agency’s increased reliance on computers means it is increasingly using “practices and procedures that harm taxpayers by acting on assumptions of noncompliance arrived at by automated processes that do not solicit, encourage or allow taxpayer response,” the report said.

The agency contacted taxpayers 15 million times in 2010 to change their claimed tax liability, according to the report. Only 1 in 10 of those contacts was considered an audit, meaning most were denied the additional rights audits allow, including the ability to go to tax court.

In one measure of error, Olson’s bureau received 21,000 complaints from taxpayers last year after the IRS blocked requested refunds because it suspected fraud. Three in four of them eventually qualified for the refunds, which averaged $5,600 and typically took six months to reach taxpayers.

In addition, the IRS corrected 10.6 million “mathematical errors” in taxpayers’ returns in 2010, more than double the 4 million it corrected in 2005, the report said. But the IRS itself made mistakes — out of 300,000 returns on which it disallowed exemptions for dependent children, it had to restore the exemption just over half the time.

The report said that at the end of last year, it took the agency more than six weeks to answer nearly half of taxpayers’ letters and faxes dealing with adjustments to their returns. And between 2004 and last year, the portion of taxpayers’ phone calls the IRS answered fell from 87 percent to 70 percent.

“Few government agencies or businesses would be satisfied if their customer service departments were unable to answer three out of every 10 calls,” the report said.

Highlighting tax code complexity, 4,428 changes have been made to the 3.8 million-word code over the past decade, the report said, including an estimated 579 changes in 2010.

On the Internet:

IRS National Taxpayer Advocate report: www.TaxpayerAdvocate.irs.gov