Jim Buttonow
Four factors that created a climate for scandal at the IRS

Budget cuts and a complicated tax code have helped lead to problems.

July 29, 2013
By Jim Buttonow, CPA/CITP

Since April, the IRS has been under fire for mismanaging its operations. The Treasury Inspector General for Tax Administration (TIGTA) reported that the IRS unfairly scrutinized tax-exempt groups and inappropriately used government funds for costly meetings and training videos. All of this has led to a firestorm in Congress and the national media—and to many questions about the objectivity and effectiveness of America’s tax collection agency.

Lawmakers and taxpayers are looking for the cause of the scandals, and the Justice Department has launched a criminal investigation. The last major IRS scandal occurred in the mid-1990s, when the agency was accused of heavy-handed tactics in enforcing the tax code. This led to IRS reforms and the Taxpayer Bill of Rights (TBOR), which caused a major reduction in IRS enforcement activity.

IRS rebounds

Since 1998, the IRS has slowly regained its enforcement presence, increasing audits, underreporter inquires, and collection cases. In 2011, the IRS nearly reached the level of audits that it conducted in the mid-1990s. Collection cases are at an all-time high, with 11.5 million accounts in IRS Collection at the end of 2012, compared with 5.6 million at the end of 1997, prior to TBOR.

The IRS is also reaching out to more taxpayers than ever before. From 2001 to 2009, the number of IRS notices and letters sent increased 570%, from 30 million in 2001 to 201 million in 2009. In the same period, the number of individual and business income tax returns increased only 13%, from 137 million in 2001 to 155 million in 2009.

IRS enforcement isn’t the only area with a large workload. The IRS steadily receives a high volume of tax-exempt applications—more than 70,000 a year, according to an IRS manager.

IRS officials have attempted to attribute the problems in the handling of applications for tax exemption under Sec. 501(c)(4) to a breakdown in process, resulting from work complexity, reduced resources, and increasing volumes. Whether this explanation is true or not, evidence that has come to light during the investigation of the scandal, including TIGTA’s report and interviews with IRS personnel, shows that complexity, a brain drain, reduced budgets, and increased workload are having adverse consequences at the IRS.

Here are four factors that created a climate for scandal at the IRS.

1. Complicated tax code

“The Code’s bigger than the Bible.” —Former Acting IRS Commissioner Steven Miller, in his testimony before Congress, April 2013

Since 2001, there have been 5,000 changes to the Code. Many areas of the Code remain so ambiguous that IRS personnel are often confused about how to interpret them.

For example, in the recent scandal involving tax-exempt groups, the IRS has claimed it selected many potentially controversial Sec. 501(c)(4) tax-exempt organization applications for further scrutiny largely because screeners wanted to provide consistent treatment in determining exempt status for these entities, according to a congressional interview with the frontline manager responsible for tax-exempt application screening.

Application examiners deferred to IRS attorneys in Washington to provide direction and clarity on many of the 501(c)(4) rules—which fueled claims that politicians were directing the scrutiny of conservative applications. However, the TIGTA report and other interviews with IRS personnel suggest that IRS employees may have sought additional scrutiny to obtain guidance on the complicated rules under Sec. 501(c)(4)

2. Buyouts and retirement of the most experienced IRS personnel

“By closely managing hiring, we’ve seen a reduction in the total number of full-time, permanent IRS employees by almost 7,000 between the end of 2010 and 2012.” —Miller, testimony before Congress

The IRS is experiencing a brain drain. In 2011, the IRS offered 2,200 buyouts to many of its most experienced senior personnel. Many management positions were then filled by “acting” managers, who are often untrained in the technical areas that they are overseeing.

For example, in the tax-exempt application scandal, the frontline manager overseeing tax-exempt application screening had little consistent oversight and reported to multiple offsite area managers, due to numerous management reorganizations. The area manager overseeing the screening operation had no experience in that area and instead had experience in employee plans, such as pensions and other areas of deferred compensation. While the area manager could prepare reports, the manager would have had little, if any, experience spotting trends in the tax-exempt application process, including identifying whether screeners introduced political bias.

3. Reduction in budget

“If a tax agency both collects more than 90 percent of federal revenues … and administers the second largest federal antipoverty program (the Earned Income Tax Credit) as well as retirement, education, and health care policies in addition to all sorts of business incentives, and then there is an eight percent budget cut over three years, including an 83 percent training budget decrease—well, to put it mildly, bad things will happen to taxpayers.” —National Taxpayer Advocate Nina Olson, in the National Taxpayer Advocate’s Fiscal Year 2014 Objectives Report to Congress released June 30

During the past two years, the IRS was subject to almost $1 billion in budget cuts. These cuts come at a difficult time for the IRS, as it attempts to upgrade its archaic computer systems, combat the rise in tax identity theft, narrow the tax gap, and provide rulemaking on many provisions of the Patient Protection and Affordable Care Act (PPACA).    

The IRS has not garnered much sympathy from lawmakers or taxpayers, with recent controversies over the IRS’s use of funds for costly training videos and conventions. And Congress has been clear that it expects the IRS to increase its efficiency and do more, even with reduced budgets, as evidenced by substantial new PPACA responsibilities and pending tax reform.

4. Heavy workload on IRS staff

The real crisis facing the IRS—and therefore taxpayers—is a radically transformed mission coupled with inadequate funding to accomplish that mission. As a consequence of this crisis, the IRS gives limited consideration to taxpayer rights or fundamental tax administration principles as it struggles to get its job done.” —Olson, report to Congress

IRS workload has continued to increase as budgets have decreased. The fallout that results when fewer employees attempt to effectively handle an increased workload becomes clear when examining the details of the tax-exempt application scandal. 

Technical screeners for tax-exempt applications were processing 20 to 25 applications daily to try to keep up with the workload, according to the frontline manager’s congressional testimony. That means that each screener would have to read, understand, and make a technical decision on a complicated 19-page application, plus exhibits and supporting documentation, every 24 minutes.

“The IRS will cut corners, eliminate protections it doesn’t understand and deems unnecessary, make decisions in ignorance of the law, and generally not spend the time necessary to understand specific taxpayer concerns until things reach a crisis level,” Olson said.

The prolonged and increasing pressure on individual IRS employees to do more complicated work with fewer resources and little oversight invites individual attempts to save productivity by cutting corners. Using shortcuts may allow the IRS to function in the short term but, ultimately, doing so is unsustainable—and may have given rise to scandal.

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Jim Buttonow, CPA/CITP, is co-founder of Beyond415. He has more than 26 years of experience in IRS practice and procedure.