On November 30, 2005, President George W. Bush signed into law the largest appropriation for the Internal Revenue Service (IRS) in the history of the agency. A remarkable share of the $10.7 billion IRS checkbook is going to law enforcement activities.
H.R. 3058, the Transportation, Treasury, Judiciary, Housing and Urban Development, and Related Agencies Appropriations Act, provides $4.725 billion for IRS law enforcement projects. That was nearly the entire IRS budget only 12 years ago.
Emphasis on Enforcement
The law specifies several activities the IRS is to carry out with the new financing. Among them:
1. Conduct more criminal investigations. The IRS has made criminal investigation and prosecution a priority for the past several years. The agency is using criminal prosecutions to send the “deterrence” message. By prosecuting more people, the agency believes it will increase “voluntary compliance.” Put another way, when you hang people in the public square, you send a message to the population: “Do what you’re told or else!”
2. Secure unfiled tax returns. IRS research indicates that over the past 10 years the number of non-filers has increased at about twice the rate of new tax return filers. The agency believes there may be as many as 10 million non-filers. The IRS is determined to unearth as many non-filers as possible, through a variety of investigative and examination programs.
3. Collect unpaid accounts. The number of people who are delinquent on paying their taxes is also at an all-time high. At a time when Congress is running budget deficits in the hundreds of billions of dollars and has promised many more hundreds of billions of dollars in entitlement programs, collecting this revenue through enforcement action has never been a higher priority.
4. Conduct document-matching programs. Document-matching programs are designed to ferret out unreported income. For example, if a Form 1099 shows you earned $60,000 but you report just $40,000 on your tax return, the IRS can determine you’ve underreported your income. Expect these programs to grow more intrusive and ubiquitous over time.
5. A general strengthening of enforcement activities. IRS Commissioner Mark Everson has made it clear since taking the helm that his administration is all about enforcement, even at the cost of taxpayer assistance and education. The budget allows the IRS to strengthen all areas of tax law enforcement, including audits, collection, criminal investigation, offshore transactions, etc.
Perhaps the most ominous aspect of this is an almost parenthetical reference in the budget (Act Section 206) to a funding initiative that is unexplained. The line item calls for $446 million that “shall be available for enhanced tax enforcement.” It remains to be seen what that means.
More Computer Upgrades
In addition to the usual (and apparently some not-so-usual) enforcement activities, Congress continues to finance growing IRS computer power. The new appropriations measure contains spending authority of $199 million through September 30, 2008 for the purchase of new and upgraded computer hardware and information technology systems.
The computers are intended to carry out a wide variety of enforcement and administrative activities. High on the list of these activities are the document-matching tasks outlined above. As the IRS gets more high-tech in its operations, the more document-matching it can perform. Through this process, the agency effectively audits taxpayers (a) without the subjects necessarily even knowing it, and (b) without incurring the investment of time and money needed to carry out face-to-face examinations.
Fight over Taxpayer Assistance
Everson previously proposed drastic cuts in the number of taxpayer assistance walk-in sites throughout the nation. The personnel at these sites were to be retrained and reassigned to frontline enforcement positions. That caused a great stir among some members of Congress and with the National Taxpayer Advocate, who works at the IRS to help taxpayers. The Taxpayer Advocate correctly argued it was unreasonable and unfair to cut taxpayer service when the tax code is growing more complex every day.
As part of the 2006 appropriations act, Congress has forbidden the IRS from cutting any taxpayer services until two events occur. First, the Treasury Inspector General for Tax Administration must complete a study detailing the impact such reductions would have on taxpayer compliance and taxpayer services. Second, the IRS must create a plan providing adequate alternative services.
The Treasury Inspector General study and IRS plan must be submitted to the House and Senate Committees on Appropriations for approval. No deadline for submission has been set. Even then, the IRS cannot move forward with any plan until it has consulted with, among others, the National Taxpayer Advocate, the IRS Oversight Board, and the Treasury Inspector General for Tax Administration.
Releasing the Hounds
Everson has stated clearly he wants to turn the dogs loose on taxpayers.
In May 2003, shortly after taking office, Everson testified before a joint Congressional IRS review committee, “It’s as simple as this. People should pay what they owe. In an important recognition of the need to do more in enforcement, the president’s budget requests a real increase in resources targeted towards enforcement–new money to expand enforcement efforts with a sharper focus on high-income/high-risk taxpayers and businesses. I believe this can and must be done without compromising taxpayer rights.
“The IRS has already launched a number of new enforcement initiatives, such as the Offshore Voluntary Compliance Initiative, identifying tax scams and schemes promoters and the Limited Issue Focused Examination. I will be looking at each of these and see where we can do more,” Everson testified.
The new federal budget gives Everson the money to do it. And with an undefined program called “enhanced tax enforcement,” taxpayers can only guess where the effort is headed.
Dan Pilla ([email protected]) is a nationally known tax litigation consultant and author of 11 books on IRS abuse prevention and cure, and problem-resolutions issues. His latest book is The IRS Problem Solver (HarperCollins). He also publishes Dan Pilla’s Confidential Tax Bulletin newsletter. His Web site is http://www.taxhelponline.com.