The cash-strapped Internal Revenue Service for years has been moving towards a more automated system of electronic filings and communications with taxpayers – a trend that helps explain why more than 90 percent of the 150 million individual taxpayers and 11 million businesses filed their returns online last year.
With funding down about 17 percent since fiscal 2010 and the IRS required to implement large portions of the Affordable Care Act and the Foreign Account Tax Compliance Act without additional resources from Congress, there were sharp declines in traditional taxpayer services by phone or in person – and that trend will accelerate.
Over the next five years, the IRS plans to embrace practices typically seen in the business world and banking in which the agency will have little if any personal contact with taxpayers, regardless of their needs. Practically all tax returns will be filed electronically, the IRS will notify taxpayers of receipt of their returns through a secure email account, and virtually all other interaction – from making payments to resolving complex tax questions to auditing returns –will be handled by electronically.
In other words, the new IRS motto essentially will be, “Don’t call us and we won’t call you.”
With far less spent on customer service and more resources shifted to enforcement operations to crack down on scofflaws and cheats, the IRS will be entering what National Taxpayer Advocate Nina E. Olson calls the “brave new world” of federal tax collection and auditing.
In her latest annual report issued this week, Olson warns that by essentially “getting out of the business of talking with taxpayers,” the government is headed down a dangerous path – one that will alienate millions of average taxpayers, small businesses and even some millennials who prefer or need to communicate in person with the IRS.
While the IRS did a good job overall in allocating limited resources in the 2015 filing season according to Olson, millions of taxpayers were unable to reach the IRS by phone, millions did not receive a timely response to their correspondence – or any response, for that matter -- and many more had to pay a tax preparer or professional for answers to tax law questions or assistance that previously came from the IRS.
“The impact of this increased compliance burden on taxpayers is significant, as is the loss of trust in the tax agency. For a tax system that relies on voluntary self-assessment by its taxpayers, none of this bodes well,” Olson wrote. “In fact, there is a real risk that the inability of taxpayers to obtain assistance from the government, and their consequent frustration, will lead to less voluntary compliance and more enforced compliance.”
Nowhere is this more evident than the IRS’s handling of identity theft, according to Olson. One study found that IRS processes harm victims of identity theft, whose cases are complex and often involve multiple years of tax filings. The biggest problem is that no one IRS employee assumes responsibility for working through the problem.
Olson also challenged the IRS’s strategy of shifting resources from customer service to enforcement, arguing that it is shortsighted and will end up generating less tax revenue from cheats than could be generated by helping others to comply with the tax laws.
“Less than two percent is collected through enforcement action,” she said. “Thus, increasing enforced collection would be a hollow victory if voluntary compliance declines because of decreasing taxpayer service and the attendant loss of good will. Moreover, it makes good economic sense to facilitate voluntary compliance because voluntary compliance is far more cost effective than enforced compliance.”
Her analysis is counter to what top IRS officials and lawmakers have argued in recent years in pushing for restoration of Republican-imposed budget cuts in the enforcement operations to enhance revenue collections.
According to Olson, if the IRS were to collect 10 percent less in enforcement revenue, it would likely cost the government less than $6 billion in foregone revenue. But if voluntary tax payments were to drop by 10 percent, tax revenues would decline by more than $300 billion.”
“The IRS’s vision of the future rests on a mistaken assumption that it can save dollars and maintain voluntary compliance by automating taxpayer service and issue resolution and getting out of the business of dealing with taxpayers directly in person or by phone,” Olson wrote.
The IRS responded in a statement Wednesday that Olson’s report did not fully reflect the agency’s long-term strategic plan, according to The New York Times.
“The IRS remains fully committed to personal service to taxpayers,” the agency said, “and the IRS believes increasing the availability of self-service interaction frees up in-person resources for taxpayers who truly need them, including those who are not comfortable online or don’t have personal access to a computer.”
Olson, the congressionally appointed watchdog of the controversial agency, acknowledged there were many positive components to the evolving IRS strategy that would speed up filings, payment of tax returns and disseminating information to average taxpayers.
However, she warned that relying too heavily on technology over personal interaction may breed a “pay to play” system in which wealthier individuals and businesses can afford to retain tax-accountants and lawyers while less well-to-do or tech-savvy taxpayers will be out of luck.
She said the large number of taxpayers who have limited or no electronic access or skills will not be able to navigate the system effectively, while the “IRS is largely ignoring this reality, hoping taxpayers will grow out of it in five years’ time.”
“This multi-channel preference even exists for younger and well-educated individuals who typically have greater preferences for online services,” Olson wrote. “As for businesses, the medium to large companies prefer online services more than small businesses.”
John Koskinen, the IRS commissioner, told The Washington Post that the move to online interactions is an obvious effort to “catch up to get into the 21st Century.”
“Our surveys show that this is what taxpayers want,” he said.