Procedural Requirements for Imposition of Penalties and Additions to Tax
The Internal Revenue Service Restructuring Act required that each notice imposing a penalty include the name of the penalty, the Code section imposing the penalty, and a computation of the penalty. The Act also requires the specific approval of IRS management to assess all non computer generated penalties unless excepted. This provision does not apply to failure to file penalties, failure to pay penalties, or to penalties for failure to pay estimated tax.
As the political season enters a fever pitch, some misguided candidates are calling for the abolishment of the IRS. Although the political rhetoric draws applause it ignores one uncontested fact: the U.S. government needs revenue to provide services to the public. Someone has to pay for our national defense, Social Security, Medicare and our highways. In a recent speech John Koskinen, Commissioner of IRS, affirmed that logic by stating, “Somebody has to collect the money and somebody has to make sure when you fill in the small card that you filled in the right numbers. You can call them something other than the I.R.S. if it’ll make you feel better.”1
Whether the U.S. continues its current system or adopts a flat tax or national sales tax, some agency must assure the integrity of returns filed by taxpayers and pursue the non-compliant. Although about 83% of Americans fully comply with the current tax system, 17% of the public chooses not to comply. In the past a vigorous IRS enforcement regime created an environment that has kept the U.S. compliance rate among the highest in the world. One only needs to look to Greece, a country with a corrupt tax enforcement agency and a populace that views compliance with tax laws as voluntary not mandatory, to understand the impact of lax tax regimes. As all the world knows, Greece is on the brink of bankruptcy caused in no small part by the refusal of its populace to pay their taxes. In the current environment where politicians use the IRS as a whipping boy one must project at some point this country may become a failed country like Greece because it chose not to adequately fund its tax agency and enforce its tax laws.
Congress has cut the IRS budget by more than $1 billion dollars over the past five years. That represents a 20% reduction in its budget in inflation-adjusted dollars and seriously imperils our U.S. tax system. The Treasury Inspector General reports less than 40% of taxpayers calling the IRS for advice during the 2015 tax season were able to speak to an IRS representative for tax advice. The IRS has also announced it is only able to answer routine tax questions and not difficult questions. It no longer provides any tax preparation assistance to taxpayers.
In the enforcement area the budget cuts have had direct impact on the number of tax returns audited by the IRS. The 2014 audit rate was about .8% down from over 1% just five years ago. There has also been a 20% reduction in IRS criminal investigations in the last year; and the rate at which the IRS is able to levy assets of taxpayers who chose not to pay their taxes is now at 50% of the rate three years ago. A Washington Post article recently reported the Dallas IRS office could not pursue individual taxpayers owing less than $1 million because of lack of sufficient revenue officer staffing. It should be noted however the IRS continues to pursue taxpayers with smaller tax obligations via its computerized Automated Collection System.
Many commentators have noted the IRS enforcement activities in examinations, collection and criminal enforcement produce $6 for every dollar spent. In other words Congress misguided IRS budget cuts have only served to increase the federal deficit. Tax cheats and scofflaws now have 20% less chance the IRS will discover their non-compliance. Those who choose not to pay their taxes know the IRS is much less likely to levy their wages or bank accounts. Many have noted at the very least the current IRS budget crisis results in a tax cut for the most dishonest Americans while the honest majority must shoulder more of the cost of our society. No one can even project the future cost of the budget cuts as more taxpayers choose to play the audit lottery or simply do not pay their taxes because of lax enforcement.
Once again this year the administration has asked Congress to partially restore the IRS budget to assure our tax system will not suffer the fate of lax tax regimes in other countries. The proposal has been derided by many in Congress. It may be many in Congress are sympathetic to tax cheats. As Mark Twain once said “The only native American criminal class is Congress.” Another great American, John Adams, our second president once said, “In my many years I have come to a conclusion that one useless man is a shame, two is a law firm and three or more is a Congress.” It is time for Congress to suspend its political vendetta against the IRS and provide adequate funding so honest Americans can feel they are not fools for choosing to comply with our tax laws.
Robert E. McKenzie is a tax partner in the firm of Arnstein & Lehr LLP of Chicago.
1. Reported by Alan Rappeport, New York Times, 3-31-15