IRS Audits Drop to All-Time Low

IRS Audits Drop to All-Time Low

Good News for Taxpayers Brings Worries to Washington

With the tax-filing deadline less than a week away, taxpayers tempted to cheat may get some satisfaction knowing they are less likely than ever to be audited by Uncle Sam.

Audits by the Internal Revenue Service (IRS) plunged to a low of one per 217 returns in 1998. The drop in audits, part of a two-decade trend, accompanies declines in IRS collection efforts such as seizures, liens and levies imposed on those who owe back taxes.

But the apparent good news for taxpayers has experts and officials worried that fewer audits are weakening the government’s ability to collect funds for programs that ultimately benefit the public.

In testimony last month before a House Appropriations subcommittee, IRS Commissioner Charles Rossotti attributed the drop in audits and other IRS collection programs to budget cuts that have reduced IRS staffing by 17,000 employees over the past seven years and to changes resulting from the 1998 IRS Restructuring and Reform Act.

Abusive tactics uncovered

Critics say the 1998 reform act, which followed congressional hearings in 1997 that uncovered abusive tactics used by IRS agents, has done little to improve operations at one of the nation’s largest federal institutions and has only further complicated the nation’s bewildering array of tax laws.

They point to the ongoing slump in audits and seizures and say the reform act demoralized the agency’s workers while failing to address the underlying problem of an overly complex tax system. They liken the passage of the reform act to “rearranging the deck chairs on the Titanic.”

“The chairs are arranged in a nicer fashion, but we’re still sinking,” said Daniel Mitchell of the Heritage Foundation, a conservative Washington think tank.

Others say the declining rates of audits and collections are an inappropriate measure of the agency’s performance. They say falling audit numbers are a temporary side effect of implementing the changes mandated by the reform act, which has given the IRS a renewed focus on making sure honest taxpayers get the answers they need.

“I think it’s the byproduct of massive change, and it’s a byproduct of a lengthy period of feast-and-famine budgeting. Today’s collections are down because of decisions made two or three years ago,” said Fred Goldberg, who was commissioner of the IRS from 1989 to 1992. “I believe the decline is a transitory phenomenon.”

Old institution, new face

The 1998 reform act came after scathing testimony from taxpayers, who detailed examples of abuse and misinformation by IRS workers. After hearing their stories, Congress created a reform commission comprising Goldberg and 17 others who gathered many more months of testimony from former commissioners, tax consultants, tax professors and taxpayers detailing problems at the IRS.

The act that resulted was the most comprehensive set of reforms made at the IRS in decades and sought to put a user-friendly face on what was perhaps the nation’s most loathed institution.

It created 71 new taxpayer rights to prevent heavy-handed tactics by IRS agents, as well as give taxpayers expanded opportunities to settle back taxes. It eliminated the agency’s divisions along geographic lines and reorganized its agents and auditors along different groups of taxpayers so that they could gain expertise in certain areas and give better advice.

“The changes were the most significant in 40 years,” Goldberg said.

Examination staffing same

Less than two years later, however, audits and enforcement statistics have continued to plunge.

According to the Transactional Records Access Clearinghouse (TRAC), a project of Syracuse University that keeps detailed statistics on IRS enforcement efforts, audit rates are a third of what they were in 1981, when one out of every 63 returns were audited.

That means taxpayers were 3 1/2 times more likely to get audited 19 years ago, even though the number of examination staff is the same — around 5,500.

TRAC says tax prosecutions are also at a low, dropping from 1,431 prosecutions in 1981 to 766 in 1998.

Meanwhile, levies put on the bank accounts of delinquent taxpayers have plunged from 3.1 million in 1997 to just over 500,000 in 1999, and IRS seizures of property for back taxes fell 98 percent, from more than 10,000 to just 161 in less than three years.

Those in the trenches say they see little immediate impact from the ’98 reforms.

“I don’t know that it’s really changed things as much as it might seem. There was certainly the promise of a kinder, gentler IRS. But on a practical level, I don’t know that things have changed that much,” said Dan Harman, a manager for an H&R Block office in Manhattan, where seven customers sat with tax preparers one day last week.

‘IRS is putting out fewer widgets’

In February, David Williams, the inspector general for tax administration, told the Senate Finance Committee that enforcement revenue has fallen 13 percent — or $5 billion — since fiscal year 1996.

“One measures an organization by its productivity — by how many widgets it puts out. It looks like the IRS is putting out fewer widgets,” said TRAC’s co-director, David Burnham, a former New York Times reporter who has written several books on the IRS.

Among the agency’s most pressing issues are its computer systems, which an IRS spokeswoman said still are based on “1960s technology,” despite tens of millions of dollars spent to upgrade them.

After 1985, when more than 100 unopened envelopes containing tax returns were found in garbage bags outside a Philadelphia IRS office, Congress funded a modernization of the agency’s computers that was to cost around $8 billion and be completed by 2001.

Another modernization plan

Yet another computer modernization plan is under way at the IRS now. The multibillion-dollar effort, the total budget of which has yet to be disclosed by the IRS, is expected to take another 15 years.

So while credit-card users can access account information from touch-tone phones, taxpayers must wait days for answers to their questions as IRS agents cross-check information from different databases. And in many instances, they get incorrect answers.

A recent study by the Government Accounting Office said the IRS gave out 9.8 million incomplete or incorrect answers to people who called its toll-free hot line last year.

Despite the drop in audits and prosecutions of tax violations, tax collections are at an all-time high. The IRS says it collected $1.77 trillion in 1998, nearly a 39 percent jump from the $1.28 trillion collected in 1994.

“Because of the economy, they are awash in taxes,” said Mitchell at the Heritage Foundation.

If not for the country’s ongoing economic boom, some said, revenue collections to fund public programs could have been significantly hurt.

“Because of their concerns of complaints from taxpayers, they have significantly curtailed activities over the last year and a half [to] two years,” said Bob Armentrout, who led the narcotics and money-laundering division within the IRS’ criminal division before retiring four years ago.

“If it wasn’t for a booming economy, the collections would be in real peril.”

9,500 changes to code

Yet even the IRS’ critics give the agency credit for trying to improve customer service. Many say the problem is not declining audits, but the tax code, which gets more complicated every time Congress changes it, straining resources as staffers are forced to undergo training for every new provision and change in law.

“Most taxpayers really don’t know what they are supposed to do,” said Marilyn Phelan, a tax law professor at Texas Tech University who was among those who testified before the IRS reform commission in 1997.

According to the IRS, there have been 9,500 changes to the tax code in the last dozen years. The number of pages in the tax code has risen from 812 to 3,500, and there are more than 700 different tax forms available.

The 1997 tax cut alone introduced 801 changes to the tax law, Rossotti told the House subcommittee last month. Two million hours were spent last year on training agency staff about new provisions in the 1998 restructuring act, he added.

Meanwhile, the agency has had to shift personnel away from enforcement efforts to duties such as manning toll-free lines for taxpayer questions as part of the agency’s mandate of improving customer service under the 1998 act, Rossotti said.

Most of budget for enforcement

In his report, “Modernizing America’s Tax Agency,” Rossotti says 98 percent of the taxes collected by the IRS are obtained via withholding taxes and other means that do not require IRS intervention. Only 2 percent of taxes come from enforcement efforts such as audits, seizures, liens and levies.

Conversely, the IRS spends 73 percent of its budget on enforcement efforts, compared with only 8 percent of its budget on pre-filing assistance to taxpayers and 19 percent of its budget at filing time.

Rossotti says enforcement is a labor-intensive and costly way to collect taxes and that it is more economical for the agency to help honest taxpayers meet their obligations.

“Enforcement revenue is not a measure of success,” he said.

Whether that philosophy proves effective remains to be seen, observers say.

Fewer audits, less compliance?

Malcolm Sparrow, an expert in public policy at Harvard University and the author of several books on government, said taxpayers are not driven by ethical motivations, but the “lurking threat” of an audit.

Sparrow, whose latest book covers how regulatory agencies manage compliance, said if fewer people believe Uncle Sam will come knocking, fewer people will feel compelled to file honest returns.

“I think they at the IRS are no doubt successfully improving the customer service aspects of their business, and it remains to be seen whether in the process they’ve done long-term damage to their enforcement and compliance-management capabilities,” Sparrow said.

“A high level of voluntary compliance will soon crumble if people get the impression that deliberate non-compliers get away with it.”

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