National Taxpayer Advocate Nina E. Olson released her annual report to Congress, identifying the combination of the IRS’ expanding workload and declining resources as the
most serious problem facing taxpayers. The result, the report says, is inadequate taxpayer
service, erosion of taxpayer rights, and reduced tax compliance. The advocate expressed
her continuing concern that the IRS’ expanding use of automated processes to adjust tax
liabilities is causing harm to taxpayers and recommended that Congress enact another Taxpayer Bill of Rights.
“The overriding challenge facing the IRS is that its workload has grown significantly in recent years, while its funding is being cut,” Olson said in releasing the report. “This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers—and at the same time reduces the IRS’ ability to deliver on its core mission of raising revenue.”
The sharp increase in the IRS’ workload is due to several factors, including the increasing
complexity of the tax code and the code’s frequent changes, the need to provide service
to an increasingly diverse taxpayer population, the IRS’ increasing responsibility for administering economic and social policies, a surge in refund fraud and tax-related identity
theft, and the implementation of new third-party information reporting requirements.
There were approximately 4,430 changes to the tax code from 2001 through 2010, an average of more than one a day, including an estimated 579 changes in 2010 alone. The IRS
must explain each new provision to taxpayers, write computer code so it can process returns
affected by the provision, and train its auditors to identify improper claims.
In addition, the report says, an expansion of refundable credits in recent years—including
the First-Time Homebuyer credit, the Making Work Pay credit, the American Opportunity
tax credit, the health care premium tax credit, the adoption tax credit, and the Additional
Child Tax credit—has helped spawn an increase in illegal activity that seeks to profit off
the tax system by filing bogus refund claims and often by stealing and using another taxpayer’s identity. While refundable credits provide valuable benefits to the target populations, they can be tempting targets for fraud because taxpayers eligible for them may
claim refunds that exceed the amount of taxes they have paid. In 2011, the IRS’ Electronic
Fraud Detection System (EFDS) flagged 1,054,704 returns on suspicion of fraud, an increase
of 72% over 2010. Meanwhile, the IRS’ centralized Identity Protection Specialized Unit (IPSU) received more than 226,000 identity theft-related cases, an increase of 20% over 2010.
“Each year,” Olson wrote, “the IRS’ task in identifying these claims has become more
challenging, with the inevitable result that some fraudulent claims are never identified
and many legitimate claims are mistakenly held up, imposing a significant burden on