By Lydia Beyoud
President Obama's fiscal year 2014 budget plan, unveiled April 10, would allocate almost $12.9 billion to the Internal Revenue Service, approximately $1 billion more than the 2012 enacted level, with a large portion of new funding to be provided by a program integrity cap adjustment.
As with the two previous budget requests by the administration, key priorities for the Service are reflected by proposed increases to the enforcement program and improving taxpayer services. Enforcement activities would receive $5.7 billion in FY 2014, a $360 million increase from 2012 funding levels, while taxpayer services would receive $2.4 billion, an increase of $172 million from FY 2012.
Another IRS priority, business systems modernization, would be funded at $301 million, down from $330 million in 2012. IRS operations, which oversees the administrative side of the Service, would receive $4.6 billion.
IRS would cut costs by $255 million under the plan by reducing staff through increased use of electronic processes, reducing leased space, and other administrative efficiencies, the Treasury Department said in a news release.
The $1 billion increase for IRS “pays for itself several times over, with strong tax enforcement returning $4 or more in revenue for each additional IRS dollar spent,” the administration said. The IRS funding is but one part of the Obama administration's $3.78 trillion FY 2014 budget plan.
“For the president to ask for an increase [in IRS's budget] recognizes its significant responsibilities” in both tax enforcement and other areas in the midst of a tough budget environment, former IRS Commissioner Mark J. Everson told BNA April 10.
In an initial review, the IRS allocations in the proposed budget appear to be balanced between enforcement and services, said Everson, who now serves as vice chairman of the tax consulting firm alliantgroup. However, the question remains as to whether the administration's budget adequately reflects the impact of the Affordable Care Act on IRS, he said.
The full budget plan proposes to raise $580 billion in new revenues, which are intended to decrease the deficit. The revenue-raising measures would come largely from increased taxes on the wealthiest members of society, partly by limiting tax deductions to 28 percent for high-income households and by codifying the so-called Buffett rule to tax millionaires by at least 30 percent. Those proposals are not expected to gain support from congressional Republicans.
With the much-anticipated release of the Obama administration's budget, a key question is whether IRS will actually see its suggested funding increases approved in the appropriations process, Everson said. “I think the political reality is that everyone likes to take potshots [at IRS]. There are very few who will support that necessary function; they should, if they want to get the deficit under control,” he said.
IRS enforcement activities are often viewed by the administration as a significant means of raising more revenue to offset the deficit. Under the new budget proposal, enforcement operations would receive the lion's share of IRS's FY 2014 funding, approximately 44 percent, primarily designated for investigations operations, identifying fraud, exams and collections, and regulatory programs. The $360 million increase to enforcement comes largely from a program integrity cap allocation of $166 million specifically for enforcement, realized through an amendment to balanced budget legislation that caps discretionary spending, the administration said.
Integrity cap increases are a budget mechanism used to increase congressional allocations for activities that generate positive net revenue, and remove them from competition against other national funding priorities.
Enforcement initiatives for FY 2014 include many items from the IRS Strategic Plan, such as addressing offshore tax evasion, using new information reporting requirements to reduce underreporting and the tax gap, and expanding pursuit of noncompliant corporate and high-income taxpayers.
“It is clear that the Service will be under a great deal of pressure to close the tax gap, so whether enforcement can bring up its enforcement activities is an important question,” given the difficult budgetary reality it finds itself in, Everson told BNA.
The tax enforcement and compliance increases are projected to yield $32.7 billion in net revenue to reduce the deficit over the next 10 years, and are proposed to be funded through the multiyear program integrity cap adjustment Treasury said.
The taxpayer service program would receive $2.4 billion under the administration's budget to continue current services, which have taken a recent hit due to sequestration, as Acting IRS Commissioner Steven Miller told a House Appropriations subcommittee April 9 (69 DTR G-8, 4/10/13). The budget appropriation provides resources for in-person, telephone, and web-based taxpayer assistance, though IRS emphasized in the budget its goal to increase service options available through the IRS website.
Modernization appropriations will be geared toward building and deploying advanced information technology systems and tools to improve efficiency and productivity, including increased use of e-filing and streamlining IT operational requirements, the administration said.
The budget would also support IRS's major technology investment program, which should “yield substantial benefits to taxpayers by fundamentally changing how the IRS does business, vastly improving both the taxpayer experience and the effectiveness of the acgency through faster taxpayer refunds and more accurate issue resolution,” the administration said.
The administration proposed a number of new measures intended to reduce the tax gap and reform the Internal Revenue Code. Among them is the proposal to add a new section to the tax code that would impose a liability on shareholders who enter into an intermediary transaction tax shelter involved in the disposition of a controlling interest in C corporate stock. Such transactions are typically designed to avoid corporate income taxes, Treasury said.
The proposal would only apply to certain taxpayers and would provide exemptions for dispositions of corporate stock or real estate investment trust (REIT) stock traded on established markets, in the shares of a regulated investment company, and other situations.
Current law does not adequately protect the federal government's interest in collecting the amounts due as a result of intermediary transaction tax shelter transactions, Treasury said, resulting in IRS being unable to collect the unpaid income taxes, interest, and penalties owned by a C corporation that has insufficient assets after engaging in one of these transactions.
The measure is expect to raise $304 million in FY 2014, and $4.9 billion over the next 10 years, according to the administration.
The administration also proposed implementing a $5,000 civil penalty for tax-related identity theft as an additional deterrent to criminal prosecutions, Treasury said. Tax-related identity theft has increased exponentially since 2008 and introducing civil penalties for identity theft could supplement the time- and resource-consuming process of criminal prosecutions as a reason to add the penalty to the tax code, Treasury said (see related story in this issue).
“I'm pleased to see some things showing up [in the budget] on identity theft,” Edward S. Karl, a certified public accountant and vice president for taxation of the American Institute of Certified Public Accountants, told BNA April 10. Tax-related identity theft is a major issues for IRS and a focus area for AICPA in providing resources to train members about best practices and securing confidential information, Karl said.
Under the proposal, IRS would be able to immediately assess a separate civil penalty on the person who filed the fraudulent return. Current law does not impose a civil penalty for tax-related identity theft. The measure is projected to raise $1.4 billion in revenue in FY 2014, and a total of $66.4 billion by 2023, according to the administration.
The budget would also index all tax-related penalties to inflation to increase compliance. Currently, increasing such penalties under the tax code requires amending the code. Penalties are infrequently adjusted for inflation, so the amount of a penalty often declines in real, inflation-adjusted terms, losing its power as an effective deterrent, Treasury said.
“Changing current practice would foster the goal of encouraging compliance, increase the penalty regime's effectiveness in deterring negative behavior, and increase efficiency by eliminating the need to enact legislation to increase individual penalties,” Treasury said. Indexing all tax penalties to inflation would raise $349 million in FY 2014, with an estimated $10.8 billion in additional revenues through 2023, the administration said.
Karl welcomed the administration's focus on using civil penalties as a compliance tool, but added that “it's probably time to take a broader look at civil penalties.” Many changes to civil tax penalties have taken place since Congress passed the Improved Penalty and Compliance Tax Act (IMPACT) of 1989, meant to encourage voluntary compliance, Karl said. The administration should take a step back and review all civil tax penalties with a fresh eye, including assessing whether they are subject to strict liability, reasonable cause, abatement, and other issues, Karl said.
Other new provisions included modifying the reporting of tuition expenses and scholarships on Form 1098-T, Tuition Statement; making e-filing mandatory for exempt organizations; protecting whistleblowers from retaliation; and providing stronger protection from improper disclosure of taxpayer information in whistleblower actions.
Texts of the General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals (Green Book) and a Treasury news release on the tax provisions in the FY 2014 budget are in TaxCore.