The Internal Revenue Service has big plans to transform itself into a more efficient and effective agency, but some tax experts have reservations about its success in closing the U.S. gross tax gap, according to speakers at a recent American Bar Association May Tax Meeting in Washington, D.C., sponsored by the Section of Taxation.
“An investment into the agency — while we’re not everyone’s favorite agency — really does pay off long term,” said Bridget Roberts, acting transformation and strategy officer at the IRS. “We have the funding to make the transformation a reality,” thanks to the Inflation Reduction Act of 2022 that earmarked $80 billion for the IRS over the next decade.
Roberts talked extensively about the plan in the session “From Strategic Planning to Implementation: Opportunities and Challenges for the IRS After the Inflation Reduction Act.” The massive 150-page strategic operating plan touts 42 initiatives and 190 key projects designed to improve services to taxpayers and quickly resolve their issues; develop cutting-edge technology, data and analytics; attract and retain a highly skilled and diverse workforce; and focus on high-income, high-wealth individuals and corporations to address noncompliance and close the tax gap.
The goal is to meet taxpayers where they are and give them choices, Roberts said. She pointed to progress that has already been made, which includes an improved customer service experience, increased digital filing options and more convenient refund options.
Roberts said the IRS, through which 96% of the country’s gross revenue flows, has an amazing amount of data that it cannot access, so construction of a data enterprise platform is underway to organize the information. The use of such data and predictive analytics also will help the agency focus on pursuing high-income individuals and businesses “where we know there is noncompliance” in paying taxes, she said.
The plan was written as a living document that will be constantly updated and have an external dashboard to chart progress and to build accountability, Roberts said. “We’re really trying to be flexible and forward-thinking.”
At a later companion session on breaking down the tax gap — the difference between taxes due and taxes paid — a panel of tax experts discussed the IRS’ transformation plan and solutions for closing the gap, which averages about $500 billion over a two-year period. The gap comes from underreporting of tax liabilities, underpayment of taxes and nonfiling of taxes.
“The (IRS) plan is a vision, a strategy” and a good start, said James McTigue, a director for strategic issues in the Government Accountability Office. Lack of resources has been problematic for the agency, which now conducts a third of the audits it did 10 years ago. “Money can’t buy you everything, but it helps,” he said. “You can do more with technology, but you can’t do everything.”
Nina Olson, executive director of the Center for Taxpayer Rights, agreed that the infusion of money will help, but “we’re reaching a cliff in four years for funding of the IRS” because most of the money is being used upfront to modernize the agency.
McTigue said underreporting accounts for about 80% of the tax gap. And the complexity of U.S. tax laws and structure has only gotten worse, which doesn’t help improve the situation.
Olson added that while the IRS may be able to focus on the underreporting segment to reduce that part of the tax gap, “all you’re doing is moving (underreporters) to the nonpayment portion of the tax gap unless you have a holistic strategy,” she added.
Panelists offered the following strategies to address the high-income tax gap:
- Research and plan. Consult with the private sector and “tell us what you’re seeing,” Olson said. And think strategically to leverage data, McTigue said. Take a step back and look at all the information that’s coming in.
- Improve data collection and organization. That will help the IRS see which taxpayers deserve scrutiny. Use “fuzzy data,” such as information about earnings and banking, to help check on compliance, said economist Mark Mazur of the Tax Policy Center.
- Know your taxpayer base. Apply the right touch to the appropriate population by using an evidence-based compliance strategy, Olson said.
- Be more transparent. McTigue advised that the IRS improve its communication with Congress and other entities about its endeavors. “The more the IRS can do to better communicate with Congress and improve and build relationships, the better.”
The panel was moderated by Roberta Mann, a law professor at the University of Oregon School of Law.