The Treasury Department’s Inspector General for Tax Administration (TIGTA) has issued a report entitled “Trends in Compliance Activities Through Fiscal Year 2012” which confirms that cuts to the Internal Revenue Service budget have taken a severe toll on the agency’s ability to carry out its enforcement mission. The report studies the IRS’s collection and examination functions during FY2011 and FY2012.
The report opens by noting that while the “Tax Gap” — the difference between what is owed in taxes each year and what is paid voluntarily — is steadily growing, both the IRS’s budget and enforcement revenue are decreasing. (In a separate audit report, TIGTA has criticized the IRS calculation of the Tax Gap as well. That report is available here.) For tax year 2001, the IRS estimated the Tax Gap at $345 billion. For tax year 2006 (the most recent estimate available), the IRS estimates the Tax Gap to be $450 billion, an increase of 30 percent. Meanwhile, the IRS budget has decreased from FY2010 to FY2012, with a further reduction of $600 million in FY2013 due to the sequester. These budget cuts have caused a reduction of approximately 8,000 full-time IRS positions since FY2010, including 5,000 from what TIGTA describes as “front-line enforcement personnel.” In addition, the report notes that over 30 percent of executives, and 20 percent of non-executive managers, are currently eligible for retirement.
The audit report notes that enforcement revenue has declined for two straight years, and is currently 13 percent less than the FY2010 level. TIGTA concluded that this decline correlates directly with the 14 percent reduction in the number of IRS enforcement personnel. At the same time, the number of tax returns being filed has steadily increased.
On the collection front, the TIGTA report notes that revenue collection decreased by 7 percent from FY2011 to FY2012. In addition, the overall use of key collection mechanisms — liens, levies,and seizures — has decreased. Between FY2011 and FY2012, the use of tax liens dropped a whopping 32 percent, but that decline is likely attributable to the new Fresh Start Initiative which limited the IRS’s ability to impose liens in certain circumstances in order to help individuals and small businesses meet their tax obligations without adding unnecessary burdens.
On the audit front, the IRS has experienced a 13 percent reduction in the number of personnel who conduct examinations of tax returns. In FY2012, the IRS conducted 4 percent fewer audits, and 70 percent of those examinations were conducted by correspondence. In FY2012, the number of individual tax returns that were examined decreased for the second straight year, while the number of corporate tax returns that were selected for audit increased to a five-year high. Gift tax examinations have increased every years since FY2009, and have nearly tripled since FY2008.
The TIGTA report concludes as follows:
The IRS faced many challenges during Fiscal Years 2011 and 2012, including implementing provisions related to new tax legislation and operating with fewer resources and employees. Several indicators showed the effect of these challenges, including a decrease in enforcement revenue, a continued increase in accounts receivable, an increase in the number of cases that might never be worked, and a decrease in the overall number of examinations. Nevertheless, many indicators increased, including gross collections and the examinations of certain tax returns. Some of these trends are cause for concern, especially given that diminished enforcement could also affect voluntary compliance over time.