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Dec. 13 — The Internal Revenue Service’s budget for 2017, perhaps unsurprisingly, doesn’t look too pretty.
President Barack Obama on Dec. 10 signed a continuing budget resolution to fund the federal government through April 28, meaning funding will continue at 2016 levels. While a flat budget may be better than a cut, it is still detrimental to an agency that has had its funding reduced by $900 million since 2010. The Senate passed the resolution ( H.R. 2028) on Dec. 9, avoiding a government shutdown after the House had passed the legislation the day before.
“I think it will be miserable, I’m operating on that assumption it will be a very difficult year,” National Taxpayer Advocate Nina E. Olson said. “Even if we get the money that we had in 2016, that’s going to be difficult.”
The agency’s mandated belt-tightening has impacted its enforcement, hiring and day-to-day operations—and even in the unlikely scenario that the IRS receives a boost down the line, it would be too little, too late, practitioners that focus on Congress and IRS administration told Bloomberg BNA.
IRS funding in 2017 is “pretty much baked in the cake,” since there will be little time remaining in the fiscal year once the continuing resolution ends, said Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute. With Republicans holding the House and Senate, and Donald Trump heading to the White House, reductions are expected into 2018, he said.
“You just listen to the rhetoric both from the Trump campaign and from the Republicans and it’s a pretty good bet that the IRS budget is going to get cut pretty significantly,” Gleckman said. “I think they’ll get worse.”
The House on July 8 passed a funding bill (H.R. 5485) that would cut the IRS’s budget by $236 million and contained several restrictions, including one barring the agency from implementing the individual insurance mandate under the Affordable Care Act. Congress will likely add more limits on the IRS in the future, perhaps on activity such as auditing partnerships, regulating small businesses or monitoring inversions and profit shifting, Gleckman said.
The Senate’s version would have kept funding levels the same.
The IRS could see some small line-item increases in areas that Congress values, practitioners said. For example, the House bill stipulates that $290 million must be spent on improving customer service, fraud prevention and cybersecurity. The funding requirement was also included in the omnibus bill for fiscal year 2016.
“The appropriations process is actually a way Congress can identify priorities or put money toward what Congress thinks are the highest priorities—obviously taxpayer service is one and cybersecurity is another,” said Mary Burke Baker, a government affairs adviser at K&L Gates LLP in Washington. Baker served for six years with the Senate Finance Committee and spent more than two decades at the IRS.
A tight budget has meant hiring freezes, fewer audits and limited phone help for taxpayers. The IRS is down 5,000 revenue agents and criminal investigators from six years ago, and IRS Commissioner John Koskinen has recently warned that the agency could fail if it doesn’t get more funding. The IRS can give back anywhere from four to 10 times the amount of money it is given in terms of additional revenues if it has the people needed to sustain the systems and operate appropriately, he said.
Budget issues have also shaped the agency’s approach to its revamped private debt collection program, which will begin this spring. The IRS will train employees at four debt collection agencies, but it won’t micromanage the program; in previous iterations, significant time and money was spent on oversight, Koskinen said.
Olson, who opposed the program, said she fears the IRS is doing it “on the cheap,” which will hurt taxpayers—particularly those with low incomes. Tax professionals have also objected, saying the program could expose sensitive taxpayer information. A tight budget also means it is harder for the IRS to issue guidance and private letter rulings, which are critical, Baker said.
“They need resources to be able do that, and if they don’t, it cripples both individuals and businesses—any type of entity,” she said. Limited help for taxpayers could also hurt compliance, the foundation of the tax system, Baker said.
Congress should hold public budget hearings and ask the IRS to provide specific, nuanced testimony about what areas need more funding and how the money would be used, Olson said.
Koskinen has said he plans to describe budget “modules” to lawmakers to explain more in depth about specific areas of the agency that need funding. But the commissioner should go beyond just saying what money is needed, and tell Congress exactly what it can expect if certain areas are funded, Olson said.
“The IRS does need more money, but it also needs to explain specifically how it is going to use that money,” Olson said. “I know members of Congress want to do that.”
The IRS should also remind lawmakers that programs like the Foreign Account Tax Compliance Act strain the agency and the government relies on the IRS to have the money it needs to run the country. That pitch will be more effective than simply saying more money is needed, said Lawrence B. Gibbs, who was IRS commissioner from 1986 to 1989 under President Ronald Reagan.
“When you say there are really serious problems with the IRS having its budget cut, people’s eyes glaze over—it’s not a terribly sympathetic agency for anyone,” said Gibbs, now a member at Miller & Chevalier Chartered.
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