November 18, 2020, was the final meeting of the 2020 Internal Revenue Service Advisory Council (IRSAC), with its annual report to Chuck Rettig, Commissioner of the IRS. Commissioner Rettig was incidentally Chair of IRSAC in the past year. The meeting was attended by the operating division Commissioners and Deputy Commissioners. The Chair of the Council this year was Diane Erbsen.For those of you who are not familiar with IRSAC, this is a Federal Advisory Committee. The IRSAC’s purpose is to serve as an advisory body to the Commissioner of the Internal Revenue Service. According to its charter, the IRSAC provides an organized public forum between IRS officials and representatives of the public for discussing tax administration issues. The IRSAC is required to hold a public meeting each year and to memorialize its advice in at least one written public report during the year to ensure transparency in the work of government agencies to keep Congress and the public informed of the activities of various advisory bodies in accordance with the FACA.This year’s one hundred and ninety-five-page report lists a number of suggestions made by the IRSAC. The report is broken into sections based on the various operating divisions of the IRS and a leading general report section. In addition this year there are appendices presenting some real-time feedback and recommendations made during the 2020 IRSAC year.Many of the recommendations made by IRSAC every year are implemented by the IRS. Some immediately during the year and others in the following years. In many cases, the IRSAC recommendations are the leading edge of change in the IRS procedures, policies, and forms.If you have an interest in being part of IRSAC the IRS seeks applications from potential new public members every year. There is a posting every year on the IRS website in the fall and notices posted elsewhere.
Many of this year’s meetings were virtual due to the Covid pandemic. The report is the result of thousands of hours of effort on the part of the 34 volunteer public members of IRSAC and on the part of the Internal Revenue Service employees from all operating divisions of the IRS who work with, advise and provide internal data to the IRSAC.
The General Report makes note of three issues that IRSAC feels are of significate weight to be addressed as the full Committee.
- Inadequate funding of the IRS is a fundamental risk to Tax Administration in the United States
- The Taxpayer First Act Should Inform IRS Operations
- Opportunities to Expand the E-Filing and Online Application Process
Overall funding for the IRS has decreased roughly 20 percent on an inflation-adjusted basis since FY 2010 including the effects of across-the-board rescissions and reductions required by sequestration and other adjustments. Adjusting for inflation, the IRS’s $12.1 billion budget in FY 2010 would equal $14.3 billion in 2020, nearly $3 billion higher than the enacted budget of $11.5 billion for FY 2020.6 With the exception of FY 2016 and FY2020, appropriations to the IRS have consistently been less than the previous year over the past decade.
Labor costs account for about 70 percent of the IRS’s budget and generally increase year-over-year due to inflationary and additional costs for existing personnel, including pay raises, employee promotions, and employee retirement contributions. As appropriations declined between FY 2010 and FY2019, the IRS was forced to take measures to reduce its workforce, including a hiring freeze instituted in 2011, offering a buyout for retirement in 2012, limited attrition replacement, and seasonal workforce adjustments across many operational areas.
The result of these budget reductions since FY 2010 is a 22 percent decline in the number of employees at the agency and a 30 percent decline in the number of employees working in enforcement roles. While the IRS saw an increase in hiring in FY 2019 and expects to make approximately 7,000 external hires between FY 2019 and FY 2020, this increase only slightly addresses the high rates of attrition in recent years. In FY 2019, the IRS employed about 78,004 employees, including temporary and seasonal staff, equating to about 73,554 full-time equivalent positions. This reflects a decrease of 21,217 full-time positions between FY 2010 and FY 2019.10 The loss of historical knowledge and experience (which benefit both taxpayers and incoming IRS staff) has been significant and is expected to worsen, with 39% of full-time permanent IRS employees eligible to retire by 2022.
Recommendations include
- Advocate for funding at a level no lower than the FY 2010 aggregate budget benchmark, adjusted for inflation, or $14.3 billion, or at minimum a level that will provide for a net increase in staffing on a sustained yearly basis.
- Advocate for consistent or multi-year funding for long-term initiatives including the customer service strategy, training strategy, and business modernization plan.
- Advocate for the IRS Program Integrity Cap Adjustment for Enhanced IRS Enforcement in addition to adequate appropriations subject to annual caps on non-defense appropriations. Encourage the Budget Committees of the House and Senate to add language to impending budget resolutions or bills that would allow the Financial Services and General Government appropriations subcommittee to increase their designated cap for purposes of IRS Enforcement and associated activities.
- Prioritize resources to increase digital acceptance and transmission of documents, including electronic filing, and digital communications to accelerate the improvement of the taxpayer experience and ensure efficient tax administration.
- Carefully consider budget account structure in light of the new organizational strategy to promote transparency of spending and ensure a balanced budget.
The Taxpayer First Act (TFA) establishes technical tax changes and tax administrative goals, including goals related to IRS strategy, customer-service focus, organization, technology and modernization. It is, in the view of the IRSAC, a welcome recognition by Congress of the value of the IRS as a bedrock institution and of IRS employees as stewards of the IRS mission to “[p]rovide America’s taxpayer’s top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” The Taxpayer First Act Office (TFAO), a separate, dedicated office the IRS created to achieve the objectives of the TFA, is a tangible commitment by the IRS to provide focus and support as the entire organization works to achieve the goals of the TFA.
Recommendations
- Facilitate methods for taxpayers and tax professionals to more easily obtain the information needed and resolve issues while reducing phone demand and decreasing reliance on paper correspondence.
- Enable new, mobile-friendly digital tools for self-service and assisted channels such as chat (especially authenticated chat) and secure digital upload.
- Ensure that the initial IRS employee addressing a taxpayer concern has authority to address and preferably resolve issues within the scope of their training and expertise and that if the initial employee cannot provide the appropriate assistance that the employee can smoothly transition the taxpayer to a subject matter expert with the knowledge and authority to provide the type of taxpayer assistance required.
- Allow in-house corporate tax departments to utilize the practitioner priority service line to facilitate compliance by the LB&I community of taxpayers.
- Leverage technology and improved training to enhance existing service channels. Improve customer experience with appointment scheduling, callbacks, virtual meetings, and enhanced training for assistors.
- Build upon the current effort to improve service to underserved taxpayers, including limited English proficiency (LEP), rural taxpayers, differently-abled taxpayers, and international taxpayers by ensuring information and customer service interactions are easily accessible in formats needed to serve the public (language, ADA-compliance, etc.).
- Provide IRS materials in multiple languages (and dialects) to help LEP taxpayers feel invested in voluntary compliance. The TFAO should continue its efforts to determine what languages need to be supported immediately, which languages can be supported at later phases, and which “services” (i.e. forms, instructions, websites, outreach material like newsletters, videos, professional organization outreach, call-center representatives, revenue agents, and technical representatives and personnel) can and should be provided in other languages and dialects.
- The IRS should continue developing strategic partnerships with local organizations and trusted networks, including local governments and other organizations already providing other forms of support to underserved communities (such as medical hospitals/clinics that serve rural areas) and organizations that support US taxpayers living outside the US and international taxpayers living in the US, much as occurred in connection with the outreach programs the IRS developed to ensure that as many eligible persons as possible received EIPs.
- Continue efforts to facilitate compliance for gig economy taxpayers who are required to report often relatively small amounts of income, as measured on a per taxpayer basis.
- Enhance the IRS Gig Economy Tax Center website by providing more direct information as well as links to publications.
- Focus attention (including through the Volunteer Income Tax Assistance and Tax Counseling for the Eldering programs) on Form 1099 reported income and reported income falling below the information reporting threshold (e.g., $600), in addition to traditional Form W-2 sourced income focus.
- Target platforms and platform sellers with educational campaigns on the tools available to assist taxpayers with meeting their tax compliance obligations.
- Provide issuers of forms in the 1099 series with a path to report suspected cases of identity theft perpetrated during the submission of taxpayer information (e.g., Form W-9) that is subsequently relied on to assign and report income on Form 1099.
- Expand taxpayer relief: Consistent with the TFA, as a corollary to the request for taxpayers and tax professionals to be patient in light of the disruptions caused by the Coronavirus pandemic, and consistent with the view that most taxpayers seek to be compliant, the IRSAC suggests the IRS consider the following:
- Expedite consideration of penalty abatement requests.
- Reevaluate what constitutes “reasonable cause” for purposes of penalty abatement to recognize barriers to complete compliance (including when taxpayers reasonably rely on professionals to electronically file tax returns and/or other forms).
- Encourage voluntary disclosures by taxpayers seeking to return to compliance.
- Leverage feedback from users and internal and external stakeholder partners to prioritize operations and services.
- Incorporate mechanisms to obtain user feedback and utilize the data to inform the prioritization of digital services and tools.
- Tap the resources of the IRSAC and its members as well as other stakeholder partners. The IRSAC intends to continue as a resource for the IRS and the TFAO and strongly recommends the IRS and the TFAO continue to review analysis by, and continue to communicate with, professional organizations and other groups to identify those areas where IRS operations function best and where IRS functions could and should be improved.
The IRS has been gradually expanding the electronic filing of returns, applications, and other documents. The most recent addition is the electronic filing of Form 1040-X, the form for individual amended returns. While the IRSAC applauds these efforts, the COVID-19 pandemic has clearly demonstrated the need to accelerate this process. Electronic filing has many benefits:
Improves the Taxpayer Experience
- Provides an electronic record of filing and receipt
- Reduces the need for phone inquiries on the status of returns
- Reduces time to process requests, inquiries, and elections
- Allows taxpayers to file from anywhere they have an internet connection
Makes Tax Administration More Efficient
- Eliminates the need to key in data, substantially reducing data errors
- Facilitates automated handling of data
- Allows 24/7 processing, even when offices are closed due to weather or safety conditions
- Saves money spent on manual processing and correction of input errors
- Provides flexibility to move work where resources are available since processing activities are no longer tied to the location of the paper files
- Reduces the need for paper record storage
- Eliminates risks to IRS personnel of physically handling the mail (e.g., COVID- 19)
- Frees up employees handling paper to be redeployed to other areas where more resources are needed
Provides Usable Data to Guide IRS Efforts
- Allows the IRS to identify compliance trends
- Provides better and more complete data, allowing the IRS to apply data analytics to shape its selection of returns to examine
The Recommendation in this section is that all forms be digitized with a number being listed as prioritized, some of which follow below. Some of them will be of great value to accountants when available in digitized form.
- Form W-7, Application for IRS Individual Taxpayer Identification Number
- Form 211, Application for Award for Original Information
- Form 941X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund
- Form 1139, Corporation Application for Tentative Refund
- Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
- Form 1045, Application for Tentative Refund
- Form 1065X, Amended Partnership Return
- Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts
- Form 2848, Power of Attorney and Declaration of Representative
- Form 3115, Application for Change in Accounting Method
- Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax
- Form 4506, Request for Copy of Tax Return
- Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes
- Form 8275, Disclosure Statement
- Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests
- Form 8332, Release of Claim to Exemption for Child by Custodial Parent
- Form 8802, Application for United States Residency Certification
- Form 8809-I, Application for Extension of Time to File FATCA Form 8966
- Form 8821, Tax Information Authorization
- Form 8822, Change of Address
- Form 8918, Material Advisor Disclosure Statement
- Form 12153, Request for a Collection Due Process or Equivalent Hearing
- Form 14039, Identity Theft Affidavit
- Form 14039B, Business Identity Theft Affidavit
- Requests for Chief Counsel Advice
- Form 843, Claim for Refund and Request for Abatement
- Form 8854, Initial and Annual Expatriation Information Statement
As with every year of IRSAC it remains to be seen what will be implemented of the recommendations made by the IRSAC. The above is only the recommendations from the General Section of the report and does not detail the recommendations of the IRSAC in the specific operating divisions sections. If history is any indication many of the recommendations of IRSAC will be implemented in the coming years. They were all made with input from IRS personnel up to and including senior management of the IRS. They were presented to the Commissioner who has been a past IRSAC chair and is very much an IRSAC supporter. The recommendations were also presented to (having reviewed them in advance) and commented on in the public meeting by the operating division heads.
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