Making the IRS Work Jonathan B. Forman University of Oklahoma College of Law Roberta F. Mann University 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 2

Presentation Outline The 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 3

Gross Collections 4

Return Processing and Audits IRS 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 corporations 2006 net Tax Gap, $385 billion ◦ 83.1% “voluntary” compliance 5

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 filed IRS filed 602,005 federal tax liens & served 1,855,095 notices of levy IRS assessed 37 million civil penalties & initiated 5,314 criminal investigations 6

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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 8

IRS Funding History 9

IRS Costs (Fiscal Year 2013) 10

Returns up, Exams down 11

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 12

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 13

Effect of Information Reporting on Taxpayer Compliance 14

Private debt collection 15

Administrative Changes by Treasury/IRS Issue Simplifying Regulations Improve the IRS’s Allocation of Resources Encourage More Enforcement Efforts Increase Transparency to Increase Compliance Change the IRS Mission Alternative Dispute Resolution & IRS Appeals 16

Encourage Enforcement Increase Transparency A 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 17

IRS Mission Current mission Proposed 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. 18

IRS Mission Current mission Proposed 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. 19

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. 20

About the Authors Jon is the Alfred P. Murrah Professor of Law at the University of Oklahoma College of Law and the author of M AKING A MERICA W ORK (Urban Institute Press, 2006). He can be reached at , 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 W ILLIAM & M ARY P OLICY R EVIEW 1 (2013). She can be reached at , 21