Taxpayer advocate makes pitch for IRS budget boost

Congress should tweak the budget process to boost Internal Revenue Service funding and help reduce the level of uncollected taxes, according to an advocate for taxpayers.

In a series of recommendations aimed at improving the IRS funding process, National Taxpayer Advocate Nina Olson urged lawmakers to adjust the budget process to fund IRS service and enforcement at the level that would maximize tax compliance. The recommendations came as part of an annual report to Congress.

"If the federal government were a private company, its management clearly would fund the accounts receivable department at a level that it believed would maximize the company's bottom line," Olson wrote.

Noting that the IRS collects about 98 percent of all federal revenues, she said its budget should be increased to make a bigger dent in the tax gap, defined as the difference between taxes owed and those collected. For 2001 returns, that difference was about $290 billion, the IRS has said.

In her report, Olson recommended that Congress revise the budget process to set IRS' funding at whatever level the agency has determined would maximize compliance, without regard to funding caps that apply to other agencies.

But acknowledging that she lacks expertise in the budget process, Olson said another option could be to returning to a practice used in the early 1990s that allowed budgeters some discretion to boost IRS funding outside of the caps.

Under that strategy, the administration and lawmakers agreed that if IRS was fully funded at the level of the president's base request, and if lawmakers chose to provide additional funding for enforcement activities, the applicable spending cap would be increased to match the enforcement amount.

James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities, said given the strong interest lawmakers have recently expressed in addressing the tax gap, there was likely to be a good reception for some sort of change on the budgetary side.

To return to the early 1990s setup, changes would have to be made by the House and Senate budget committees with the approval of the rest of Congress, Horney said. "Appropriators aren't wild about these kinds of systems because [they let] other committees make the decision about how money can be used, but they would prefer it to one that set funding outside the appropriations process," he said.

Horney said the earlier system fell out of favor as part of a broader backlash against IRS enforcement activities. But the pendulum of taxation policy appears to be swinging back toward enforcement, in part as IRS officials have gotten out the word that compliant taxpayers are subsidizing the noncompliant by an average of more than $2,200 per return, according to the most recent figures.

Senate Budget Committee Chairman Kent Conrad, D-N.D., has said that he intends to focus on closing the tax gap and suggested that he would be open to new strategies on the revenue side.

In her recommendations, the taxpayer advocate urged lawmakers to broaden their focus from just enforcement to encompass service as well, noting that good taxpayer guidance, accurate telephone assistance and other service components help people file their taxes correctly.

She recommended that Congress increase IRS personnel funding at a rate of about 2 percent per year for the next five to 10 years, and demand a more detailed analysis of the return on investment from various IRS expenditures so that spending can be optimized.