Watchdog: IRS stretched thin by new missions

The Internal Revenue Service's independent watchdog warned today that the tax-collection agency isn't well-equipped for its upcoming role in paying out billions of dollars in benefits under the new health insurance law.

Nina E. Olson, the IRS's Taxpayer Advocate, said in a report to Congress that the tax-collection agency is being stretched thin by the growing number of programs that involve paying money out rather than taking it in.

Olson warned that there are stark cultural and structural differences between an enforcement agency like the IRS and a benefits agency, and that the IRS is not structured, or funded, to provide the one-on-one casework necessary to administer complicated benefits programs.

The IRS has paid out hundreds of billions of dollars in recent years, often in the form of refundable tax credits, for anti-poverty programs and middle-class subsidies. The list of big payout programs includes the Making Work Pay Tax Credit, the Homebuyer Tax Credit, and the Earned Income Tax Credit for low-income working parents.

And it will soon include tens of billions of dollars each year for health insurance subsidies to low-income people who will be required to get insurance under the new health care law. Those subsidies will be delivered as tax credits to health insurers and small businesses.

Olson said the growing list of responsibilities has forced the IRS to divert staff and resources away from its central purpose of collecting taxes to fund the federal government.

"The increasing use of the IRS to administer benefit programs is placing significant strains on the IRS's limited resources and requiring the IRS to perform tasks that go well beyond its current mission statement," she wrote.

Olsen stopped short of requesting more funding to accommodate the new tasks. Instead, she called for a revision to the existing IRS mission statement.

"While some may view a mission statement as trivial, such a revision would provide explicit recognition that the IRS is performing two distinct roles," she said. "A revised statement would make clear that the IRS will require sufficient funding to perform effectively as both a tax collector and administrator of social benefit programs."

But IRS officials don't agree that the wording of the mission statement is a problem. Agency representatives defended both the current mission statement and the extent to which the agency performs its responsibilities.

"The concept of administering economic and social benefits through the tax code is implicit in the IRS's role of running the overall tax system, not something separate and apart," the agency said in its response to Olson's report.

The report also argues that the agency is "tormenting" taxpayers with the use of enforcement tactics like tax liens, and that compliance requirements place an undue burden on filers.

Other reports in recent months have found significant issues with IRS enforcement of benefit provisions. A recent report by the Treasury inspector general for tax administration found that the IRS was having trouble keeping up with new tax provisions and verifying taxpayer benefits. This report also found that poor information and filing mistakes related to Making Work Pay will cause millions to owe money.

Olson argued that these issues highlight the need for a comprehensive overhaul of the tax code.

Rep. Dave Camp, R-Mich., the new chairman of the House Ways and Means Committee, said the new report strengthened his own case for pushing ahead with hearings on tax reform.

"I'm very interested in starting the discussion on tax reform," Camp said. "I think [the report] helps make the case for why we need significant change."