Making the IRS WorkJonathan B. Forman University of Oklahoma College of LawRoberta F. MannUniversity 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 85,000 employees and a $12 billion budget

The Paper provides overviews of the tax system and of tax administration

And offers recommendations for change

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Presentation OutlineThe 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

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Gross Collections

Return Processing and AuditsIRS processed more

than 240 million tax returns (Fiscal Year 2013)◦ collected $2.9 trillion

($0.41 to collect $100)

◦ issued $364 billion in refunds

◦ to combat refund fraud suspended or rejected

more than 5.7 million suspicious returns

& worked with victims of identity fraud to close more than 899,000 cases.

IRS sent 2.0 million “math error” notices

IRS examined 1,558,057 returns (0.8%)◦ 1.0 % of individuals◦ 2.5% of corporations◦ 0.42% of partnerships

and of S corporations2006 net Tax Gap,

$385 billion◦ 83.1% “voluntary”

compliance

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IRS Enforcement Efforts (FY2013)

IRS collected◦$47.2 billion from taxpayers with returns

filed with additional tax due◦$1.8 billion with respect to returns that

were not timely filedIRS filed 602,005 federal tax liens &

served 1,855,095 notices of levyIRS assessed 37 million civil penalties

& initiated 5,314 criminal investigations

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Appeals and Litigation

IRS Appeals handles 120,000 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 some 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

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IRS Funding History

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IRS Costs (Fiscal Year 2013)

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Returns up, Exams down

Recommendations

Increase IRS Funding◦For every $1 spent on IRS operations,

$244 was collected ($2.9 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

Alternatively, we need to restructure the IRS to work within its current budget

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Congress could: Improve the legislative

process◦ Simplify the tax laws◦ 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, cert. granted November 7, 2014)

Streamline controversy process◦ 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?◦ Streamline controversy

Increase third party reporting

Provide for private debt collection

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Effect of Information Reporting on Taxpayer Compliance

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Private debt collection

Administrative Changes by Treasury/IRS

Issue Simplifying RegulationsImprove the IRS’s Allocation of

ResourcesEncourage More Enforcement

EffortsIncrease Transparency to Increase

ComplianceChange the IRS MissionAlternative Dispute Resolution &

IRS Appeals 16

Encourage EnforcementIncrease TransparencyA recent TIGTA

report found that IRS employees could take more action to collect outstanding taxpayer liabilities before closing cases as currently not collectible◦ E.g., file more notices

of federal tax lien

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

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IRS Mission

Current missionProposed mission (Olson)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.

Mission should reflect IRS’s dual role as part tax collector, part benefits administrator.

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IRS Mission

Current missionProposed mission (Caplin)

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.

To collect the proper amount of revenue in a fair, efficient, and impartial manner.

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.

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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 AMERICA WORK (Urban Institute Press, 2006). He can be reached at jforman@ou.edu, 405-325-4779, www.law.ou.edu/faculty/forman.shtml.

Roberta is the Loran 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 1 (2013). She can be reached at rfmann@uoregon.edu, 541-346-3854, http://law.uoregon.edu/faculty/rfmann.

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