Wednesday, November 11, 2015

Please Give: Passionate Plea for IRS Funding from Former IRS Commissioners

The IRS faces constant funding pressure from Congress, despite becoming a victim of constant mission creep thanks to Congressional mandates (ACA and FATCA in particular). Over the years many have pled with Congress to stop underfunding the agency. The latest comes from seven former commissioners, who note that not least among the reasons to fund the IRS is the need to spend money on cyber security as the IRS fends off one million hacking attempts each week.

That's a lot of hacking because of course the payload is enormous. FATCA has surely expanded the payload significantly by developing an enormous database of personal information attached to bank account numbers and detailed account activity on a global scale. Even a small breach of security with respect to that vault will be disastrous for the taxpayers involved.

The commissioners also suggest that the IRS workload is going to increase due to BEPS. BEPS is expected to result in more treaty-based conflicts among jurisdictions, so I expect more competent authority hours will be needed. But it's likely also the case that country-by-country reporting requirements will add another enormous treasure trove of information to the database, further increasing the payload.

At minimum, Congress has simply got to fund security for this massively expanding taxpayer information database.
November 9, 2015

The Honorable Thad Cochran
Committee on Appropriations
United States Senate
113 Dirksen Senate Office Building
Washington, D.C. 20510

The Honorable Harold Rogers
U.S. House Committee on Appropriations
U.S. House of Representatives
2406 Rayburn House Office Building
Washington D.C. 20515

The Honorable Barbara A. Mikulski
Vice Chairwoman
Committee on Appropriations
United States Senate
503 Hart Senate Office Building
Washington, D.C. 20510

The Honorable Nita M. Lowey
Ranking Member
U.S. House Committee on Appropriations
U.S. House of Representatives
2365 Rayburn House Office Building
Washington, D.C. 20515 
Subject: IRS Appropriations for Fiscal Year 2016
Dear Chairman Cochran, Vice Chairwoman Mikulski, Chairman Rogers and Ranking Member Lowey: 
We are all former Commissioners of the Internal Revenue Service. Over the last fifty years we served during the administrations of Presidents John F. Kennedy, Lyndon B. Johnson, Ronald Reagan, George H.W. Bush, William J. Clinton, and George W. Bush.

We are writing to express our great concern about the proposed reductions by the House and Senate in appropriations for the Internal Revenue Service for the current fiscal year that will end on September 30, 2016. We understand that the Appropriations Committees in the House and Senate have proposed to reduce the FY 2015 IRS appropriation of $10.9 billion by $838 million and $470 million, respectively, for the current fiscal year. If Congress were to reduce the IRS appropriation for the current year, it would represent yet another reduction in the IRS appropriation. The appropriations reductions for the IRS over the last five years total $1.2 billion, more than a 17% cut from the IRS appropriation for 2010. None of us ever experienced, nor are we aware of, any IRS appropriations reductions of this magnitude over such a prolonged period of time. The impact on the IRS of these reductions is that the IRS has lost approximately 15,000 full-time employees through attrition over the last five years, with more losses likely in the current fiscal year unless Congress reverses the funding trend. These staffing reductions come at a time when the IRS workforce is aging, with nearly 52% of IRS employees now over the age of 50 and 24% already eligible to retire. Three years from now, 38% of IRS employees will be eligible to retire. This loss of IRS knowledge and experience is alarming, particularly in light of the fact that, out of a present workforce of about 85,000 employees, the IRS has only about 3,400 employees under the age of 30 and only 384 employees under the age of 25 due to hiring freezes for budgetary reasons at the IRS since 2010 and periodically from 2005 to 2010. Over the last fifty years, none of us has ever witnessed anything like what has happened to the IRS appropriations over the last five years and the impact these appropriations reductions are having on our tax system.

These reductions in IRS appropriations are difficult to understand in light of the fact that, at the same time these reductions have occurred, the Congress repeatedly has passed major tax legislation to substantially increase the IRS workload. Most recently the Congress passed the Foreign Account Tax Compliance Act and the Patient Protection and Affordable Care Act, two major new programs, each of which significantly expands the IRS' tax administration burdens. The IRS personnel reductions come at a time when the IRS is stretched to the breaking point to cope with tax enforcement challenges attributable to global and domestic changes that are impacting our tax system. Increasingly, the United States is facing tax challenges as the result of efforts that are taking place in the international tax arena to deal with the tax non-compliance that is accompanying the continued globalization of business and investment activities. The most recent tax changes to address international tax non-compliance are proposed in the Organization for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting Report. Regardless of one's view of these proposed changes, it is clear that the IRS will be substantially impacted by changes and challenges of other countries who adopt them.

Additionally, increasing incidents of identity theft and refund fraud are being perpetrated against our tax system by large, sophisticated organized crime syndicates around the world. These criminals seek to file false returns and claim fraudulent refunds using personal taxpayer data obtained from sources outside the IRS. At the same time, many unlicensed, unregulated return preparers are preparing and filing fraudulent tax refund returns. Every time there is an information technology hacking event in the public or private sectors in which Social Security numbers are stolen, the likelihood exists for additional identity theft and refund fraud. The growing refund fraud challenge to our tax system is especially alarming to us because of the need, which is fundamental to our tax system, for the IRS to be able to assure taxpayers who are paying their fair share of taxes that other taxpayers are doing the same thing. To emphasize the seriousness of refund fraud, the Government Accountability Office earlier this year placed identity theft and refund fraud on its list of "high risk areas" in the federal government, a sure sign to each of us that the IRS should have more, not fewer, enforcement resources to deal with this threat to the integrity of our tax system,

To place the impact on our tax system of the Congressional IRS appropriations reductions over the last five years in its proper context, Congress almost annually over the last 25 years has passed legislation that has imposed additional burdens on IRS tax collection and administration under our revenue laws. During this time, the Congress also repeatedly added more and more socio-economic incentives to the tax code and called upon the IRS to administer these new socio-economic programs, including healthcare, retirement, social welfare, education, energy, housing, and economic stimulus programs, none of which is related to the principal job of the IRS to collect revenue. At the same time, Congress passed even more legislation to pay for these tax spending programs. The result is that almost 30 years after the 1986 Tax Reform Act, our tax laws are a mess. Our tax laws have become so difficult for taxpayers to understand that 80% of all individual taxpayers now use paid consultants or software to prepare their income tax returns. Because of insufficient IRS resources in FY 2015, an average of more than 60 percent of the taxpayers who called the IRS for assistance in preparing their returns during the last filing season were unable to reach an IRS assistor, even after many taxpayers had remained on the telephone for more than 30 minutes before they were automatically cut off because of the volume of calls, which the reduced numbers of IRS assistors were unable to handle. Equally serious are the cybersecurity threats illustrated by the problem that occurred earlier this year involving unauthorized attempts to access taxpayer information using the IRS' Get Transcript online application. Separately, the IRS continues to experience about one million attempts each week to hack into its main information technology systems. Although the IRS has so far successfully thwarted these attacks and its main systems remain secure, all of this astonishes us and emphasizes to each of us that the IRS taxpayer assistance and IRS information technology resources are severely underfunded, especially when compared to the increasing cybersecurity budgets of private sector companies.

It is clear to each of us that the IRS appropriations reductions over the last five years materially and adversely affect the ability of the IRS to assist taxpayers who are trying to comply with their tax obligations, as well as the ability of the IRS to detect and deter taxpayers who have not complied with their tax obligations. Recently, we understand that the IRS estimated a direct annual revenue loss to the Federal government in tax enforcement at $6 billion last year and $8 billion this year, due to such appropriations reductions. Historically, for every dollar invested in IRS tax enforcement, the United States received $4 or more in return, and we understand that continues to be true today.

The Congressional Budget Office in its June 2015 Long-Term Budget Outlook projected future fiscal challenges to the United States because of the large and increasing size of our national debt and rising future operating deficits attributable to an aging U.S. population and rising healthcare costs. It, therefore, is imperative that our tax system in the future operate at an optimal level in order to maximize the revenues the IRS collects. For that to happen, the IRS must be able to assist taxpayers who are trying to comply with their tax obligations, and at the same time be able to enforce the tax laws against those taxpayers who have not complied with their tax obligations. In short, because of our country's fiscal and other challenges, our tax system must work and work well to collect the taxes that are owed.

Some have argued that the IRS can solve these problems by simply becoming more efficient. This argument ignores the reality that the IRS is already, by far, the most efficient tax collection agency among large countries in the world. The OECD recently released its bi-annual analysis of tax administration across the developed world and reported, based on 2013 statistics which don't reflect the most recent IRS budget cuts, that the amount the IRS spends to collect a dollar in taxes is approximately half the average amount spent by all OECD countries. Germany, France, England, Canada and Australia all spend as much as two to three times the amount the IRS does to collect a dollar of revenue.

In light of the foregoing, we fail to understand how it makes any logical sense to continue to reduce, rather than increase, the IRS budget for FY 2016 in order to optimize the IRS' ability to provide taxpayer service and to enforce the tax laws to increase revenue collections. To put it succinctly, we do not understand why anyone with present and projected debts and annual losses as large as those of the United States would refuse to pay for telephone assistance to people trying to fulfill their tax obligations, would turn their back on $8 billion annually in additional revenue, or would fail to make an investment that offers a return equal to at least four times the amount invested. For these reasons, we respectfully call upon each of you to support and work to accomplish the passage of an IRS appropriations request for FY 2016 that is substantially in excess of the appropriation for the IRS in FY 2015.

Mortimer M. Caplin (1961-64)

Sheldon S. Cohen (1965-69)

Lawrence B. Gibbs (1986-89)

Fred T. Goldberg, Jr. (1989-92)

Shirley D. Peterson (1992-93)

Margaret M. Richardson (1993-97)

Charles O. Rossotti (1997-2002)


  1. A view this little as a bit of crocodile tears. The IRS might complain at some level about the burden of FATCA but it is a burden the IRS and its parent Agency US Treasury whole heartedly requested. Additionally the IRS is on the record in terms of admitting to moving funds from Customer Service to offshore and FATCA related enforcement something they were under no obligation to do given the core importance of taxpayer assistance in a voluntary self assessment system and the fact on many previous occasion the IRS has chosen not to enforce many aspects of tax law due to limited resources(see sailing permits, reid amendement, non resident alien estate tax, cfc check the box and on and on).

    The IRS appears to be playing a deceitful game of trying to have its cake and eat it to by being able to shift money from taxpayer assistance to FATCA and to eventually get new money from Congress to bring taxpayer assistance back up to previous pre FATCA levels. Additionally other former senior IRS officials who are not listed on this letter such as Michael Kirsch and Richard Harvey are on the record as stating FATCA and international enforcement is far far more important to the social cohesion of the United States than traditional taxpayer assistance.

    Again to cite people like Harvey and Kirsch back in the days (1970s/1980s) when the IRS had much more international taxpayer assistance non compliance was still very high whereas under the more enforcement centric heavy handed FATCA in theory international non compliance is going down. So from the Kirsch/Harvey(both were high level IRS/Treasury officials) there is actually very little value in traditional taxpayer assistance in the whole scheme of things relative to enforcement first.

    Additionally the IRS has picked other "policing" type authorities that don't have much to do with tax. The IRS needs to strongly look at giving these up especially if they are short of resources. IRS agents don't need guns and badges and if they need police-type assistance during audits for example they should call in the assistance of "real" police such as is done in Canada and other countries not have their own internal private IRS/CI police with guns, flashing lights, and badges.

  2. I don't have any inside info but I guess I would be surprised if there really is that much revenue to be found in international compliance for individuals residing abroad. Yes, gotcha penalties, but tax revenues in the long term? I don't really quite see it when most nonresident USPs live in high tax countries. Once you get past the transition (roundup) period, with proper foresight and planning is there really that much tax to get from Canadian residents for example? But maybe the gotcha penalties are sufficient to make the attention worthwhile, I really don't know. Still, the data protection issue seems like a real concern. To the extent keeping a lock on the vault isn't a top priority for funding, that would make me think there is a systemic policy problem rather than an agency problem.

  3. I don't necessarily agree with this but my guess is those in favor in international compliance(like a Michael Kirsch) would make an argument along the lines of that international compliance of US individuals in Canada in of itself might not bring in much revenue the second and third order effects of letting individual non resident compliance go unenforced are very costly. For example if resident US citizens see lots of US citizens living in Canada not being in tax compliance(even if the revenue loss is very minimal) they might did decide not to comply with US tax law either which conceivably(according to Kirsch and Harvey) would be quite expensive and detrimental.

    I personally think this argument isn't that sound and perhaps dangerous institutionally for the IRS to make. Basically is cutting core customer service functions to fund a enforcement program that will bring in very little direct revenue directed towards a population the IRS knows little about on the basis of preventing second and third order tax morale and compliance among resident US citizens something the IRS really want to get up and pound the chest about to defends. If anything if the international enforcement don't work due to legal challenges etc than conceivably second order domestic tax morale problems could made be made worse not better than if the IRS just let sleeping dogs lie.

  4. On another note I feel it would be good for both Canada and the US for someone to do a book on the last five years of FATCA and its implementation interviewing both sides(Canada and the US, pro and con) and the major players on each side such as yourself, myself, Jesse Eggert, Itai Grinberg, Richard Harvey, Joe Arvay, John Richardson, Ginny Deegan, Stephen Kish, Murray Rankin, Doug Schulman, Brian Ernewein, Terry Campbell, James Jatras, Nina Olsen and Stephen Shay(and a bunch others I have forgotten). My inspiration for this idea is the book recently written by Chantal Hebert and Jean Lapierre called the Morning After discussing the behind the scenes politics of the 1995 Quebec Sovereignty referendum. My personal suspicion is what might find out the behind the scenes of FATCA implementation was a lot like the behind the scenes of 1995 referendum if not actually worse(i.e. having referendum not actually make QC a sovereign country as was publically claimed but in reality to improve its bargaining position vis a vis the rest of Canada).

    Below is a video and interview with the authors that appeared on CBC a while back.

    Most importantly a history should be done as Chantal Hebert points out before everyone goes to their grave.

  5. Residence-based taxation for the US would solve most of about you plead THAT. IRS???