Balancing Competing Interests in the IRS Future State

• Develop innovative tools and services to empower taxpayers to fulfill compliance responsibilities.

• Develop processes to analyze, change, and deter noncompliant behavior.

• Leverage and collaborate with external stakeholders to better understand taxpayer needs.

• Cultivate a well-trained workforce.

• Use data analytics and robust feedback to select high-value work.

• Increase the agility, efficiency, and effectiveness of IRS operations.

At the forefront of the initiative is the creation of online accounts where taxpayers can independently resolve issues. As explained by Commissioner John Koskinen, “[m]ost things that taxpayers need to do to fulfill their obligations could be done virtually, and there would be much less need for in-person help, either by waiting in line at an IRS assistance center or calling the IRS.”[ii] The IRS is hopeful this approach would free up its limited resources to better serve those needing one-on-one assistance.

The IRS also wants tax practitioners to participate in this process. According to the NTA, tax return preparers and other authorized third parties (such as tax software companies) could access online accounts to obtain return information, submit payments, and receive status updates. This would further reduce direct IRS involvement in simple administrative matters.

Where We Are Today

The IRS has taken steps to increase its online presence and collaborate with external stakeholders to understand taxpayer needs. Examples include the Where’s My Refund and Get Transcript applications (following a security breach last year, a more secure version of Get Transcript is now available). Collaborative efforts to engage the public in the design process are evidenced by the IRS’s recently sponsored “Tax Design Challenge” (a crowdsourcing competition where participants designed online taxpayer experiences). According to Commissioner Koskinen, the Tax Design challenge reflects the IRS’s “strong commitment to engaging the public in efforts to build for the future state of tax administration.”[iii]

In addition, the NTA has hosted public forums on taxpayer needs and preferences around the country. In her 2017 Objectives Report to Congress, the NTA stated, “what we heard at the Public Forums around the country were voices of real taxpayers and their real representatives. They are compelling, articulate, and clear about what they need in order to comply with the tax laws.”[iv] Common themes from the forums included enhancing taxpayer trust through personalized contact with the IRS, supplementing innovative digital tools with human interaction, and the benefits and limitations of online accounts.

Regardless of where we are today, as the Future State evolves, the IRS will need to balance its interests with those of taxpayers and tax practitioners to ensure the program’s success.

A Maze of Competing Interests

There are three main players in the Future State: the IRS, taxpayers, and tax practitioners. Naturally, each has its own interests to consider.

IRS Priorities. In theory, the IRS’s chief priority is increasing voluntary compliance. The Future State’s emphasis on efficiency and technological advancement fits well with this objective. However, there is a human element to voluntary compliance that hinges on the public’s trust in government. Some wonder whether this trust would further deteriorate if the IRS became more automated and distant.

The reality is the IRS is learning to adapt to reduced funding and fewer resources. Its budget declined from $12.1 billion in fiscal year 2010 to $10.9 billion in fiscal year 2015 (a 10% decrease). On top of that, the IRS has been tasked with enforcing the Affordable Care Act and administering benefit programs sanctioned by the Code (like the earned income tax credit). This begs the question of whether the Future State is merely a coping mechanism for budgetary constraints and added responsibilities.

Taxpayer Priorities. The interests of taxpayers are best described by the Taxpayer Bill of Rights.[v] Of particular importance are the right to be informed, the right to quality service, and the right to a fair and just tax system. On the whole, Americans want to timely file accurate tax returns, especially considering more than 70% will likely receive refunds this year. However, this can easily change if taxpayers are met with unreasonable delays or incorrect information from IRS representatives. In a country where tax laws are constantly changing, the public expects quality service from the IRS.

Tax Practitioner Priorities. Although they share many of the same interests as taxpayers, tax practitioners are primarily concerned with how IRS service affects their livelihood. In a recent AICPA survey, 36% of respondents said that greater efficiency in responding to written communications would have the most impact on their practice. In that same survey, 38% of respondents said it took over 90 days for the IRS to provide a substantive response to a written letter. Recognizing that time is money, practitioners see the need for more accessible and efficient communication with the IRS.

Practitioners also acknowledge the importance of modern and secure technology. This includes having multiple options for contacting the IRS, such as email, telephone, and even video chat. Increased automation is also appealing, especially when it comes to accessing client accounts online and processing a power of attorney. However, the question still remains: will the Future State, as envisioned by the IRS, satisfy the needs of tax practitioners while protecting taxpayer rights?

Trouble in the Future State

On the surface, the Future State looks promising. Yet critics question whether online accounts will drastically reduce demand for face-to-face services. According to a 2015 Pew Research Center study, 16% of American adults do not use the internet. And those with internet access may not feel comfortable handling complex financial transactions online. More importantly, many tax inquiries are too fact-intensive to be resolved online. These considerations have led the NTA to conclude that the IRS “has not conducted sufficient research into taxpayer and practitioner service needs, especially with regard to access and preference for online services.”[vi]

A bigger concern, however, is the program’s potential to jeopardize taxpayer rights. Specifically, the NTA is worried that a reduction in personal service options may undermine the right to quality service, the right to be informed, and the right to pay no more than the correct amount of tax. The fear is that a taxpayer will go online and quickly pay balances supposedly due before issues are properly vetted. There is also the question of whether online self-correction constitutes an original or amended return, which obviously has statute of limitations implications for taxpayers.

Granting third parties online access to taxpayer accounts may also pose problems. According to the NTA, increased reliance on tax return preparers and other third parties will substantially increase compliance costs for taxpayers who directly work with the IRS. In addition, there are data security issues to consider. The NTA has suggested that the IRS restrict online account access to only preparers subject to Circular 230. This should give taxpayers some comfort that their confidential information is secure. However, given the prevalence of cyberattacks, the IRS will need to develop a protocol for tracking practitioner access and preventing unauthorized activities.

Moving Forward

It’s clear that the Future State is riddled with uncertainty, and like it or not, it’s well on its way to becoming a reality. There are many positive aspects of the plan. However, as recommended by the NTA, the IRS needs to “design a taxpayer service strategy based on the actual requirements of the taxpayer population rather than focusing on initially attractive but ultimately short-term resource savings.”[vii] This will require collaboration between the IRS, taxpayers, and tax practitioners. The bottom line is that these groups will need to balance competing interests to improve tax administration. Although this will be difficult, a system that makes paying taxes a little less painful is definitely worth the effort.

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[i] National Taxpayer Advocate 2015 Annual Report to Congress vol. 1, 5, available at http://www.taxpayeradvocate.irs.gov/Media/Default/Documents/2015ARC/ARC15_Volume1.pdf.

[ii] Excerpt from Commissioner John Koskinen’s Senate Finance Committee Testimony on February 10, 2016, available at https://www.irs.gov/PUP/newsroom/FSTaxpayerInteraction.pdf.

[iii] IRS News Release IR 2016-86, available at https://www.irs.gov/uac/winners-of-tax-design-challenge-announced-taxpayer-experience-of-the-future-illustrated-with-creative-displays-of-tax-data.

[iv] Taxpayer Advocate Fiscal Year 2017 Objectives Report to Congress, 2, available at http://taxpayeradvocate.irs.gov/Media/Default/Documents/2017-JRC/Preface.pdf.

[v] See also IRC Sec. 7803(a)(3).

[vi] National Taxpayer Advocate Fiscal Year 2017 Objectives Report to Congress, 102, available at http://taxpayeradvocate.irs.gov/Media/Default/Documents/2017-JRC/Area_of_Focus_4.pdf.

[vii] National Taxpayer Advocate 2015 Annual Report to Congress vol. 1, 62, available at http://www.taxpayeradvocate.irs.gov/Media/Default/Documents/2015ARC/ARC15_Volume1.pdf.

 

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Shaun Hunley is a Technical Editor with Thomson Reuters Checkpoint within the Thomson Reuters Tax & Accounting business.