Bringing the Internal Revenue Service into the 21st century requires more than a makeover, it needs a modern day overhaul.

The National Taxpayer Advocate in its 2016 Annual Report to Congress, said the IRS needs more money, oversight and a reformed tax code, if it wants to meet its mission.

“More funding is paramount — for taxpayer service, for compliance functions, for the agency’s enforcement function (criminal investigation), for technology, and for its ‘support’ operations like security and real estate,” said National Taxpayer Advocate Nina Olson. “Simply put, the IRS cannot function well in the 21st century with the budget it has today.”

Similarly, the agency can’t transition into a new era with an outdated tax code, the report stated. Nearly 6,000 changes to the Tax Reform Act have been made since its passage 30 years ago.

“The code has grown more complex by the year. … The compliance burdens the tax code imposes on taxpayers and the IRS alike are overwhelming,” the report stated. “A TAS analysis of recent IRS data shows that taxpayers and businesses spend about six billion hours a year complying with tax-filing requirements.”

Future State

Reforming the tax code takes congressional action, and the taxpayer advocate also recommended that Congress reinstate annual hearings to review the IRS’ strategic plan.

“By holding recurring joint oversight hearings, the IRS will have the opportunity to articulate, with specificity, its need for additional resources and its plans for applying them,” the report stated. “Hearing from both the IRS and outside experts — including tax professional organizations, business representatives, low income taxpayer clinics, and behavioral scientists — Congress will better understand the challenges that both the IRS and taxpayers face.”

In its 2015 annual report, TAS highlighted the IRS’ Future State plan as the most serious problem facing taxpayers.

The plan, according to the IRS, builds on multiple efforts to “transform technology, communications, processes and skills,” and improve taxpayer services.

But TAS argues the plan “redefines tax administration into a class system, where only taxpayers who are the most noncompliant or who can ‘pay to play’ will receive concierge-level service or personal attention.”

Special focus

The report also gives the IRS a number of recommended actions to take to address identified problems.

This year’s annual report includes a “special focus” section that Olson said is “arguably the most important piece I have written about the IRS in my 15 years serving as National Taxpayer Advocate.”

The Special Focus section highlights three “foundational themes” that emerged from a year of public forums and focus groups: tax reform, voluntary compliance and establishing minimum standards and testing for tax return preparers.

Olson also recommended seven other areas in her special focus section that the IRS should consider as it looks to the future. Those areas include budget and oversight, culture and outdated infrastructure.

The IRS’ fiscal 2010 budget was $12.1 billion. In fiscal 2016 it was $11.2 billion. The IRS every year processes more than 150 million individual tax returns, issues refunds worth more than $345 billion and has to protect itself against as much as $24 billion in identity theft and fraud.

But too often, Olson said, “in response to budget constraints, the IRS makes penny-wise, pound-foolish decisions.”

“The IRS spreads thin the resources it has, and every decision to apply resources in one place means that another area goes begging. Understandably, it focuses on what it considers its major obligations — the filing season, new legislation, and the area of information technology and cybersecurity,” the report stated. “The consequences of this ‘big item’ focus are that smaller, important, taxpayer-facing service is reduced or eliminated, including the community presence of education and outreach, Taxpayer Assistance Centers (TACs), compliance personnel, and appeals officers.”

The report also pointed out that of the $2.3 billion allocated for taxpayer services, about 75 percent of it goes to receiving and processing tax returns and payments.

“What if the tax agency adopted a different approach toward taxpayers?” the report asked. “What if it assumed that taxpayers, by and large, wanted to obey the law and that the primary mission of the tax agency was to facilitate that compliance by providing taxpayers with the assistance, education, and clarity they need to meet their tax obligations? This is not to say we should ignore those who are actively evading tax. Rather, it is to say we should design our tax system around the taxpayers who are trying to comply, instead of those who are actively trying not to.”

The IRS also needs to address its online account options for taxpayers. Not only do digital copies of notices not exist, but the agency is also years away from connecting its dozens of case management systems together to be able to share client information.

Family status

The National Taxpayer Advocate identified 20 of the most serious problems for IRS in its report. Those problems include: voluntary compliance, earned income tax credit, fraud detection, appeals and the Affordable Care Act.

In line with the overaching tax code reform, the taxpayer advocate recommended consolidating “family status” provisions to better reflect 21st century households and ensure they are getting benefits.

While the report usually contains two parts, one with problems and recommendations, the other with TAS-related research and studies, this year’s report includes a third volume made up of literature reviews on tax administration subjects.

“We wanted to look at the IRS in a broader context,” Olson said, “and the literature reviews have enabled us to bring insights from other disciplines and other countries and apply them to IRS problems and challenges.

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