Making the IRS Work
Jonathan B. Forman
University of Oklahoma College of Law
Roberta F. Mann
University of Oregon School of Law
Our Focus

Our Paper considers how to redesign the
federal tax system so that the IRS can
better administer it
◦ given that, in the best of times, Congress is only
willing to allow the IRS around 82,000
employees and a $12 billion budget
The Paper provides overviews of the tax
system and of tax administration
 And offers recommendations for change

2
Presentation Outline

The problems facing
the IRS
◦ Shrinking budgets
◦ Increasing complexity
of tax system
◦ Tax controversy
process is
unnecessarily
complicated

Solutions
◦ Congress
 Tax reform
 Improving legislative
process
 Controversy
 Litigation
 Appeals
 Third party reporting
 Private debt collection
◦ Administrative
 Simplifying regulations
 Re-allocate resources
 Change the mission
3
Gross Tax Collections
4
60
Percentage Composition of Federal
Receipts by Source, 1940-2015
Individual
income tax
50
Corporate
income tax
Percent
40
30
Social insurance
and retirement
receipts
20
Excise taxes
10
0
1940 1950 1960 1970 1980 1990 2000 2010
Other
Year
5
Federal Revenues by Source, 1940–
2015 ($ millions)
Individual
income
Fiscal year
taxes
1940
892
1960
40,715
1980
244,069
2000
1,004,462
2010
895,549
2015 estimate 1,478,076
Corporate
income
taxes
1,197
21,494
64,600
207,289
191,437
341,688
Social
insurance
and
retirement
receipts
1,785
14,683
157,803
652,852
864,814
1,065,012
Excise
taxes
Other
1,977
698
11,676
3,923
24,329 26,311
68,865 91,750
66,909 140,997
95,898 195,398
Total
receipts
6,548
92,492
517,112
2,025,218
2,162,706
3,176,072
6
Gross Collections by Type of Tax,
Fiscal Year 2014
7
IRS Funding History
8
IRS Budget and Workforce
9
Number of Employees
10
Staffing for Key Enforcement Occupations
Number of Full-Time Equivatlents (FTEs)
16,000
14,000
Revenue Agents
11,629
12,000
10,000
8,000
6,000
4,000
2,000
Revenue Officers
4,439
Special Agents
2,475
0
2005 2006 2007 2008 2009
2010
Fiscal
Year2011 2012 2013 2014
11
Trends in Compliance Activities Through Fiscal Year 2013
IRS Costs (Fiscal Year 2013)
Figure 1: Fiscal Year 2013 Funding by
Core Appropriation (in Billions)
Source: TIGTA analysis of IRS budget appropriations.
12
Decreases in funding continue to affect the number of IRS employees available to meet the IRS
Costs Incurred by Budget Activity,
FY 2014 ($ thousands)
Budget activity
Total obligations against appropriated funds
Taxpayer Services
Total
Prefiling Taxpayer Assistance and Education
Filing and Account Services
Enforcement
Total
Investigations
Examinations and Collections
Regulatory
Operations Support
Total
Infrastructure
Shared Services and Support
Information Services
Business Systems Modernization
Total
11,591,007
2,345,229
628,940
1,716,289
4,944,885
604,070
4,169,169
171,646
4,054,808
874,938
1,137,127
2,042,743
246,085
13
Costs, Personnel, and U.S. Population,
FY2005-FY2014
Fiscal year
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Operating
Costs
(thousands of
dollars)
$10,397,837
$10,605,845
$10,764,736
$11,307,223
$11,708,604
$12,353,344
$12,358,877
$12,059,409
$11,597,560
$11,591,007
Number of
Employees
(full-time
equivalent
position U.S. population
realized)
(thousands)
94,282
296,972
91,717
299,835
92,017
302,807
90,647
305,554
92,577
308,189
94,711
310,390
94,709
312,649
90,280
314,908
86,974
317,132
84,133
319,804
14
Personnel Summary, FY 2014
Employment status, budget activity, and selected personnel type
Internal Revenue Service, total
Employment status:
Full-time permanent
Other
Budget activity:
Examinations and Collections
Filing and Account Services
Information Services
Prefiling Taxpayer Assistance & Education
Shared Services and Support
Investigations
Regulatory
Business Systems Modernization
Selected personnel type:
Revenue Agents
Seasonal Employees
Customer Service Representatives
Tax Examiners
Revenue Officers
Special Agents
Tax Technicians
Attorneys
Appeals Officers
Number of employees
at close of fiscal year
78,121
76,126
1,995
37,266
17,925
7,258
5,594
5,194
3,608
1,201
74
11,422
4,100
8,820
8,496
4,353
2,454
1,357
1,454
758 15
Return Processing and Audits

IRS processed almost
240 million tax returns
(Fiscal Year 2014)

◦ sent 1.7 million “math
error” notices
◦ examined 1,384,365
returns (0.7%)
◦ collected $3.1 trillion
 ($0.38 to collect $100)
◦ issued $373 billion in
refunds
◦ to combat refund fraud
(in FY 2013)
 suspended or rejected
more than 5.7 million
suspicious returns
 & worked with victims
of identity fraud to close
more than 899,000 cases.
IRS





0.9% of individuals
1.3% of corporations
0.36% of S corporations
0.43% of partnerships
2006 net Tax Gap,
$385 billion
◦ 83.1% “voluntary”
compliance
16
Number of Returns Filed, by Type of Return, Fiscal Year
2014 (numbers are in thousands)
Type of Return
United States, total
Income taxes, total
C or other corporation
S corporation, Form 1120–S
Partnership, Form 1065
Individual
Forms 1040, 1040–A, 1040–EZ
Forms 1040–C, 1040–NR, 1040NR–EZ,
1040–PR, 1040–SS
Individual estimated tax, Form 1040–ES
Estate and trust, Form 1041
Estate and trust estimated tax, Form 1041–ES
Employment taxes
Estate tax
Gift tax, Form 709
Excise taxes
Tax-exempt organizations
Supplemental documents
Number
239,875
185,540
2,221
4,643
3,799
147,445
146,568
877
23,608
3,206
618
30,066
34
335
987
1,467
21,446
17
Returns up, Exams down
18
Examination - Large Corporation Return Closures &
Coverage Rates, by Fiscal Year (corporations with
assets $10 Million and higher)
2005 2006 2007 2008 2009 2010 2011 2012
2013
2014
Total Returns 10,829 10,578 9,644 9,406 9,536 10,207 10,459 10,752 9,876
7,858
Examined
Returns Filed 54,091 56,877 57,357 61,641 65,546 61,570 59,291 60,489 62,347 64,261
in Prior CY
Coverage
20.0% 18.6% 16.8% 15.3% 14.5% 16.6% 17.6% 17.78% 15.84% 12.23%
19
IRS Enforcement Efforts
(FY2014)
IRS collected $57.15 billion from
enforcement activities
 IRS filed 535,580 federal tax liens &
served 1,995,987 notices of levy
 IRS assessed 40.3 million civil penalties &
initiated 4,297 criminal investigations

20
Amount of Enforcement Revenue Collected
Compared to Gross Accounts Receivable
21
Enforcement Revenue Collected, by
Fiscal Year ($ billions)
Collection
2006
28.2
2008
31.1
2010
29.1
2012
30.44
2014
33.20
Examination
13.0
15.8
16.9
10.20
12.51
Appeals
4.3
4.8
6.7
4.20
6.47
Document
Matching
3.3
4.7
4.9
5.27
4.97
48.7
56.4
57.6
50.20
57.15
Total
22
Number of Levies Issued
23
IRS Guidance & Other Activities
Forms and publications (every year)
 Regulations, revenue rulings, revenue
procedures, and other formal guidance
 Private letter rulings
 437 million visits to www.irs.gov in
FY2014 & more than 69 million taxpayers
got assistance through the toll-free
telephone hotline or at walk-in sites

24
Appeals and Litigation
IRS Appeals handles ~ 115,000 cases a
year
 Courts: Tax Court, U.S. District Courts,
the U.S. Court of Federal Claims;
Bankruptcy Court; U.S. Courts of Appeal

◦ Tax Court handles ~ 30,000 cases a year
◦ Other Courts (U.S. Department of Justice, Tax
Division) handles most of the rest
 6,600 civil tax cases, 700 tax appeals
 1,300 to 1,800 criminal tax cases each year
25
SUMMARY OF PROBLEMS:
Problem 1: The IRS is Underfunded
E.g., although Obama’s Fiscal Year 2014
Budget requested $12.5 billion in FY 2015
led to just $10.95 billion
 More than $900 million in budget cuts
since 2010
 Number of employees down by more than
9% since 2009

26
Problem 2: The Tax Code is Too
Complicated

Endless Legislation Adds to Complexity
◦ 15,000 tax code changes since 1986
◦ Late in the year tax legislation is the worst
◦ Expiring provisions

The IRS has increasing responsibilities
◦ Increasing number of tax expenditures
◦ a wide variety of economic, health & social
welfare programs
◦ ACA, FBAR, first-time homebuyer credits
27
10 Largest Tax Expenditures
($ billions)
Provision
Exclusion of employer-provided medical care
Deductibility of mortgage interest
Capital gains (except agriculture, timber, iron
ore, and coal)
Exclusion of net imputed rental income
Defined contribution employer plans
Deferral of income from controlled foreign
corporations
Step-up basis of capital gains at death
Deductibility of nonbusiness State and local
taxes other than on owner-occupied homes
Defined benefit employer plans
Deductibility of charitable contributions, other
than education and health
2015
206,430
69,480
85,360
2015-24
2,673,780
1,068,910
1,047,140
78,810
68,040
64,560
956,320
917,390
811,980
63,440
47,490
801,340
660,280
44,640
44,280
621,050
606,750
28
Problem 3: Tax Controversy Process
is Unnecessarily Complicated
Many administrative appeal mechanisms
 Many litigation choices

29
Recommendations

Increase IRS Funding
◦ For every $1 spent on IRS operations, $264 was
collected
 ($3.1 trillion revenue ÷ $11.6 billion IRS budget)
 While much comes in “voluntarily,” each additional
dollar spent on enforcement should raise at least $6 or
$7
 U.S. Department of Justice, Tax Divisions, collects
$12 for each $1 spent

Alternatively, we need to restructure the
IRS to work within its current budget
30
Congress could:
1) Simplify the tax system
 Fundamental revamp
 Simplify certain provisions
2) Improve the Legislative Process
◦ Permanent Loophole-closing Commission
◦ Make Congress Write the Details
 a co-dependent relationship
 Treasury and the IRS have become enablers of
sloppy legislation
 Congress is not good at writing the details
 Consider King v. Burwell (Affordable Care Act)
31
Congress could:
3) Enhance third-party information reporting
$140
$120 B
$120
$100
$80
Underreporting Gap
$64 B
56%
$60
Net Misreporting Percentage
$40
$20
$11 B
1%
$12 B 8%
11%
$0
Amounts subject to
substantial information
reporting and withholding
(e.g., wage & salaries)
Amounts subject to
substantial information
reporting (e.g., pensions &
annuities, unemployment
compensation, dividend
income, interest income,
Social Security benefits)
Amounts subject to some Amounts subject to little or no
information reporting (e.g., information reporting (e.g.,
deductions, exemptions,
nonfarm proprietor income,
partnership/S-Corp income,
other income, rents and
capital gains, alimony
royalities, farm income, Form
income)
4797 income, adjustments)
32
Congress could:
4) Simplify the Tax Penalty System
5) Increase transparency to increase
compliance
◦ Professor George Yin recently recommended
increasing disclosure of the IRS’s decisions in
the exempt organization area
◦ Public disclosure of the tax returns of
corporations
33
Congress could:
6) Streamline Dispute Procedures
◦ IRS & Justice spend a great deal of their
resources on dispute resolution and litigation
◦ Streamline procedures so taxpayers get one
bite of the apple
◦ Expand Tax Court jurisdiction
 U.S. Court of Federal Claims?
 National appellate tax court?
7) Give the IRS More Authority to Regulate
Tax Practitioners and Tax Preparers
34
Congress could:
8) Consider expanding private debt collection
• But probably more bang for the buck from
giving $ to the IRS
35
Administrative Changes;
Treasury/IRS could:
1) Issue Simplifying Regulations
2) Move to a Return-free System
3) Improve the IRS’s Allocation of Resources
◦ Shift resources from guidance to enforcement
◦ Shift audit resources
◦ Expand the Compliance Assurance Process
(CAP)
4) Expand Alternative Dispute Resolution and
the Use of IRS Appeals
36
Current mission

To provide America’s
taxpayers top quality
service by helping them
understand and meet their
tax responsibilities by
applying the tax law with
integrity and fairness to
all.
Proposed mission
(Olson)

Mission should reflect
IRS’s dual role as part
tax collector, part
benefits administrator.
IRS could: 5) Change its mission
37
Current mission

To provide America’s
taxpayers top quality
service by helping them
understand and meet
their tax responsibilities
by applying the tax law
with integrity and
fairness to all.
Proposed mission
(Caplin)

To collect the proper
amount of revenue in a
fair, efficient, and
impartial manner.
IRS could: 5) Change its mission
38
Final Thoughts



We continue to believe that taxpayers & the
fisc would be best served by increasing the
IRS budget, in line with its increasing
responsibilities.
Failing that, we offered ways the IRS could
better cope with its limited budget.
But if Congress continues to beat up on the
IRS, respect for the agency and compliance
are both likely to continue to decline.
39
About the Authors


Jon is the Alfred P. Murrah Professor of Law at the
University of Oklahoma College of Law and the author
of MAKING AMERI CA WORK (Urban Institute Press,
2006). He can be reached at jforman@ou.edu, 405-3254779, www.law.ou.edu/faculty/forman.shtml.
Roberta is the Mr. & Mrs. L. L. Stewart Professor of
Business Law at the University of Oregon School of Law
and the author of Economists are from Mercury,
Policymakers are from Saturn: The Tax Policy
Implications of Communication Failure, 5 WILLIAM &
MARY POLICY REVIEW 34 (2013). She can be reached at
rfmann@uoregon.edu, 541-346-3854,
http://law.uoregon.edu/faculty/rfmann.
40