IRS commissioner warns against cutting his budget

Proposed cuts of $2 billion to the Internal Revenue Service contained in the Republican House-passed fiscal 2012 budget resolution would "increase the deficit by deceasing revenue, and could have an impact on long-term compliance," IRS Commissioner Douglas Shulman told a Senate panel Wednesday.

"In this time of fiscal austerity and belt-tightening, we have achieved $190 million in efficiency savings and will find more," said Shulman, appearing before the Senate Appropriations Subcommittee on Financial Services and General Government to defend the Obama administration's request for a 9.4 percent increase for the IRS, to $13.6 billion. Examples of the efficiencies included closing five of 10 data centers and discontinuing automatic mailings of the basic 1040 tax form.

Committee Chairman Dick Durbin, D-Ill., in his opening remarks noted that the IRS "represents the face of government to more U.S. citizens than any other agency."

In prepared remarks Shulman said the IRS in fiscal 2010 collected $2.3 trillion in gross revenue to support the federal government, approximately 93 percent of all federal receipts; processed more than 140 million individual income tax returns; and issued 109.5 million refunds to individual taxpayers totaling $366 billion. He added that there were almost 305 million visits to -- a 14 percent increase over the same period in 2009.

Some 75 percent of taxpayers, Shulman said, are now using electronic filing, making it "one of the most successful modernization programs in history." The agency processed 100 million returns electronically in 2010, including its 1 billionth electronic return since the option became available in 1986. The cost per electronic return, he added, is 17 cents versus $3.66 for a paper return. "In 20 years, my guess is IRS won't take any paper returns," he said.

Overall, Shulman said, the IRS saves the government $200 for every dollar invested in its enforcement, modernization and management systems.

Senators asked Shulman about recent IRS shortcomings examined by the Treasury Inspector General for Tax Administration having to do with tax fraud by prisoners and by ineligible people claiming tax credits for energy-saving home improvements.

"When we have the name of a prisoner, we can stop the refund, but the problem is getting data," Shulman said. He said is working with governors of the 10 states with the most prisoners, and with some cities and counties to get better data. Prosecution is tough, however, he said, because "our biggest hammer is sending people to jail, but these people are already in jail." In addition, some prisoners are married and filing jointly, so "you don't want to deny the spouse" a legitimate refund, he said.

Data problems also apply to enforcement of the energy tax credit. The agency is trying to balance the need to quickly get the refunds out the door with the need for screening using filters and later audits. "We stop the vast majority" of ineligible claims," he said.

Shulman was asked about fraud and how to close the stubborn $345 billion tax gap. "As one economist said, it's like a deep shale oil reserve -- not easily tapped," he said. But the U.S. record on compliance is as good as those of other nations, he added, and there is some hope for progress using improved information technology -- credit card processing data bases, rather than receipts, for example, are "both less expensive and are less hassle for the taxpayer."

The chief areas of tax fraud, Shulman said, are funds hidden overseas, unscrupulous preparers and refundable tax credits.

Sen. Jerry Moran, R-Kan., noted that much of President Obama's proposed increase would fund IRS efforts to implement the 2010 health care law. He praised the recent repeal of that law's paperwork requirement on small businesses' filing of 1099 forms, getting Shulman to acknowledge that the IRS cut 82 staff members after the repeal. "Will you be prepared if the health care law is found unconstitutional?" Moran asked.

"Our job is to administer laws that are on the books, though this is a high-profile one," Shulman said. "We're implementing it. With the 1099 provision, we would have been prepared. We did some small planning, then it was repealed, so we stopped."

Moran also asked about a National Taxpayer Advocate report of a decline in the quality of telephone aid to taxpayers. Shulman pointed out that the service lost 1,200 employees due to budget cuts last year. "Our phone service helps bring in revenue, but in tough budget times, there's always a tendency to put more money in enforcement, so you get longer wait times and more calls" to the phone banks, he said. "We need to find a balance."

Sen. Mark Kirk, R-Ill., asked Shulman why the IRS didn't invent its own tax preparation software to compete with vendors like TurboTax and H&R Block. "Taxpayers spend $2 billion a year just to comply," Kirk said. "That's a hidden tax on average of $250 a year."

Shulman said, "We've looked at that, but it's not that simple. I'm not sure we should be in the business of creating software with all those sets of choices. We have a full plate."

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