Democratic lawmakers plan to boost the Internal Revenue Service’s enforcement authority to help pay for the spending package working through Congress. But while the I.R.S. needs more funding to fulfill its mission, the current version of the reform legislation would run roughshod over decades of taxpayer protections that were enshrined by huge bipartisan majorities.
I have worked on I.R.S. administration and reform issues for my entire career, from fielding calls from distressed taxpayers facing overbearing I.R.S. actions during my first day on the job at the National Taxpayers Union to testifying before Congress. David Keating, then executive vice president of the N.T.U., served on the National Commission on Restructuring the Internal Revenue Service, whose work led to the I.R.S. Restructuring and Reform Act (R.R.A.) of 1998. The R.R.A. passed with overwhelming bipartisan support: 402 to 8 in the House and 96 to 2 in the Senate.
The R.R.A. is the heart of modern taxpayer protections. It refocused the I.R.S. on taxpayer services, solidified burden-of-proof standards in tax disputes, established the I.R.S. Oversight Board to provide expert guidance, and strengthened the office of the National Taxpayer Advocate.
But the job of protecting taxpayer rights remains unfinished. The Oversight Board has been frequently short of a quorum, rendering it impotent. The I.R.S. has also fought against constraints on its power, implementing what are called “speed-up audits” that give taxpayers less time to respond to its enforcement attempts. Representative John Lewis led passage of the Taxpayer First Act two years ago, to offer “a ray of hope” for Americans wronged by the I.R.S. Yet the new Independent Office of Appeals created under that Act to mediate taxpayer disputes has had insufficient resources during the pandemic.
The spending proposal now in Congress alters one of the R.R.A.’s key constraints — a provision that I.R.S. supervisors approve certain tax penalty assessments. The plan would weaken this check against I.R.S. agents aggressively using penalties to force taxpayers into settlements. What’s worse, this provision would be made retroactive to 2001, imposing penalties that had been dismissed in decades’ worth of tax cases.
Inappropriate and excessive penalties have been thrown out on this oversight provision, but Congress could effectively create litigation on 20 years of tax cases in its hunt for more revenue for the I.R.S.
Beyond the rollback of taxpayer rights, the retroactivity of these provisions could face legal trouble. Retroactive taxation is still widely practiced, and used to pressure taxpayers to settle with the I.R.S. While the Supreme Court has never definitively ruled on the practice, when it last considered the issue in 1994’s United States v. Carlton, it came close to deciding that anything beyond one year of retroactivity violates due process. Given a retroactive tax case again, the court may rein in the practice for good.
Ironically, the I.R.S.’s budget increase is unlikely to raise the revenue Congress anticipates. Estimates of the tax gap are highly uncertain. The administration projects that its $80 billion enforcement and changes to reporting requirements would yield $700 billion in revenue, but this is far beyond what other nonpartisan estimates have suggested.
The I.R.S. (and taxpayers) could indeed benefit from more funding — properly spent. The I.R.S. faces an immense backlog of tax return processing every year, caused by antiquated information technology infrastructure and a customer service staffing shortage. Some problems are basic — for example, the Treasury Inspector General for Tax Administration (TIGTA) found that more than 40 percent of the agency’s printers and copiers are broken. On the whole, there are 142 unimplemented recommendations that TIGTA has suggested be undertaken by the I.R.S., along with a growing list of recommendations from the Government Accountability Office (G.A.O.). The implementation of these recommendations would raise additional revenue each year.
But so far Congress has not insisted that specific issues be addressed, instead using a mere two paragraphs of legislative text to provide a massive boost to I.R.S. funding. Congress should make tax compliance easier and more efficient, and would raise revenue and narrow the tax gap by doing so. Any increased funding plan should require the I.R.S. to meaningfully address taxpayer service shortcomings, and implement recommendations from G.A.O. and TIGTA. Taxpayer protections, ranging from formal citizen complaint reviews to more public-comment opportunities for rulemaking, should be instituted.
More resources for customer service, taxpayer rights safeguards, a functioning Oversight Board, actionable and regularly-updated research on the tax gap, and innovative approaches such as the recently proposed enforcement fellowship pilot program are all solutions that should unite Washington — just as concern over taxpayer rights has for over 30 years.