Like many more esteemed people than me, I have called for increased resources to the IRS to help close the “tax gap.” Republicans in Congress have blocked closing the tax gap as a means of funding infrastructure.
Giving the benefit of the doubt to the IRS funding detractors, perhaps the problem is that what we’ve got here is failure to communicate.
The tax gap is the difference between the amount collected by the tax system, currently about $3.6 trillion per year, and the amount that would be collected with full compliance with the law. Estimates range from about $585 billion to $1 trillion or more each year.
Perhaps a reasonable objection to added IRS funding to close the gap is fear that the agency will subject ordinary Americans to unwarranted examinations. This might be the case if new funding were used only to increase enforcement.
Circling back to these “more esteemed” people than me, former National Taxpayer Advocate Nina Olsen, and former IRS Commissioner Fred Goldberg, have pushed for added IRS resources to help close the tax gap.
To counter failure to communicate problems, Olsen and Goldberg provide some facts about how IRS resources should be used to deal with the gap issue.
“Noncompliance” with the tax laws is not the same as deliberately trying to evade taxes. The complexity of the law itself makes compliance challenging. Taxpayers need help, including IRS customer service.
In the “old” days, which included the early years of my tax career, people could call an IRS hotline and get answers to basic tax questions. These calls helped get the return right. Calling for IRS help is no longer an option.
Current audits are largely letters from the IRS. These letters are incomprehensible to the average taxpayer. People who get these letters usually don’t know what the problem is or how they could resolve the issue.
Calls for added IRS resources include heavy investments in information technology and customer service. Both will help taxpayers to comply with the law in a non-threatening way.
Noncompliance includes paying too much tax because taxpayers lack information to properly report tax basis of assets sold. Use of modern information technology can allow IRS to help with the overpayment problem.
Modern data analytics can allow IRS to use artificial intelligence to create a feedback loop that looks for patterns of noncompliance. The system can learn from “false positives” that currently waste taxpayer and IRS time running down nonexistent fraud or identity theft.
Olsen and Goldberg say that matching reported income against documents provided to IRS and using a rule-based audit approach is “low hanging fruit.” These approaches will do little to close the tax gap.
Olsen also notes that less than 2% of the $3.6 trillion currently collected comes from IRS enforcement action. Voluntary compliance with the law is important. A change in approach that treats people in a way that reduces their desire to comply will likely lead to less revenue collected.
There is a knowledge gap between IRS employees and tax practitioners. This is a function of greatly reduced funding for IRS training. Olsen said that her 2,000 employees had to be trained on a base training budget of $20,000 annually.
Tax practitioners tell stories of excessive hours spent on IRS audits due to lack of training of IRS agents. Similar stories abound of hours wasted on hold on the phone. The same for trying to demystify and resolve computer-generated audit inquiries.
Olsen believes that added resources can be used to simulate the old face-to-face interaction with IRS personnel by using the video conferencing everyone uses on their smart phones.
Studies show taxpayers will “show up” for appointments with IRS personnel, even if done by computer or cell phone video. IRS letters with deadlines to reply are often ignored.
Maybe Congressional opponents of IRS funding are victims of failure to communicate. Unfortunately, I fear funding opponents may instead think it’s just their job to oppose the IRS. “Cool Hand” Luke said, “Callin’ it your job don’t make it right.”
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.