IRS, forced to operate with less, to see a decline in service.

Both the House and the Senate have approved drastic cuts in the Internal Revenue Service's 1997 budget. President Bill Clinton's request for approximately $8.1 billion for the IRS in 1997 is likely to be shaved by between $1 billion and $1.4 billion in the final budget. Treasury Secretary Robert E. Rubin told Congress last summer that given the severity of the budget reductions, the IRS will not be able to provide taxpayers with the services they have the right to expect. And CPAs who work directly with the IRS echo Rubin's concern.

Although the cuts come on the eve of the November elections and are very popular among politicians who want to downsize federal government, efforts to restructure the IRS are not new. The bipartisan, multiagency focus on IRS operations has been growing since the 1994 elections. Reports by' the General Accounting Office and the National Research Council found the IRS was making poor progress in addressing management deficiencies, especially in the area of systems modernization.

These reports weighed heavily on Congress's decision to reduce IRS funding, but many professional organizations that work with the IRS believe the cuts are both excessive and ill-timed. In a letter to the Senate Committee on Appropriations, the Tax Executives Institute said that although vigilant oversight is essential, "inadequate funding of the IRS may exacerbate the current level of taxpayer frustration with the tax system."

According to Phil Brand, director of KPMG Peat Marwick's IRS policies and dispute resolution department in Washington, D.C., and former IRS chief compliance and chief operating officer, the reductions in funding are worse than they appear and will cut deep into the IRS infrastructure. He expects the service staff to be reduced by 10,000 full-time employees in 1997; in July, the IRS said its force would be cut by 5,000 by March 1997. "About 75% to 80% of the IRS budget is spent for its payroll," said Brand. The IRS, facing a $350 million reduction from its 1996 budget, also must factor in a 2% to 2.5% federally mandated pay raise in January. "If you take personnel costs off the table, there are very few places that can absorb these cuts" said Brand.

The IRS will be forced to reduce funding for its staff support systems-- such as training, research material and telecommunications equipment, which are already targets of budget cuts--as well. In addition, the service will have to slash travel, the money available to file liens on delinquent accounts and expert witness fees, Brand said. "All these cuts look good on paper, but it will create serious slow-downs and difficulties in IRS agents' ability to resolve issues."

No more business as usual

CPAs who have seen the ramifications of the IRS's 1996 budget constraints-- down approximately $140 million from 1995--in their dealings with the IRS are worried that the 1997 cuts will only make matters worse. Brand said CPAs will notice reduced examinations-with a drop of 2,000 positions from personnel in compliance. Frank Keith, IRS spokesman, told the Journal that the loss of 2,000 "revenue generating" positions would have a serious effect on the number of audited tax returns, as well as the number of liens and levies that will be filed. Also, businesses' audit cycles may be extended from two-year to three-year cycles. But perhaps the most serious consequences of the budget cuts will be the delays CPAs will experience in individual cases.

"There will not be enough revenue officers to process the volume of collections cases efficiently," Brand said, adding that it would be increasingly difficult to access the IRS by telephone, fax or letter as the service centers lose personnel. "Taxpayers and practitioners are not likely to be pleased when they try to resolve issues with the IRS."

For many CPAs, the 1996 budget cuts have already made resolving cases an exhausting process. Dorene B. Smith, a sole practitioner in Atlanta, said the time it takes the IRS to respond to her phone calls, faxes and letters is already too long. Her biggest concern is that the deep cuts would make it impossible for the IRS to improve the systems it needs to respond more quickly. Smith said a sluggish IRS would directly affect taxpayers' pocketbooks. "Taxpayers who lose a case will ultimately have to pay more in interest and penalties because the IRS will take so long to respond," said Smith.

Howard T. Martin, a sole practitioner in Washington, D.C., and former IRS national director of appeals, experienced delays of more than a year after he filed a protest with the IRS appeals division before he was able to meet with an appeals officer. "The 1997 cuts could lengthen the appeals response time to as long as two years." Martin said unrepresented taxpayers will have even more problems next year than now, especially when they try to use the toll-free numbers. "Voicemail will not help voluntary compliance; taxpayers who want to pay what they owe or who have a question will be discouraged when they reach an automated voicemail system."

Martin notices the cutbacks in support staff when he visits IRS offices. "Recently, I had problems meeting the agent with whom I had an appointment because the office no longer had a receptionist," said Martin. "Now I always take a cellular phone with me so I can let the agent know I am in the building." He also said he has heard agents complain they have no paper for their copy machines.

The damage runs deep

The budget cuts will likely have a major impact on the morale and professionalism of IRS staff. According to KPMG's Brand, for the first time employees with years of experience at the IRS are worried about losing their jobs. He said the freeze on new hires has closed an important pipeline for talented young agents. "It takes three to five years to train an agent in the examination division to handle the more complex cases," said Brand. "CPAs may be very frustrated with the training and experience of the agents they will have to deal with."

Brand also said the IRS would continue to find it difficult to enforce compliance for special programs such as the low-income housing credit and tax-exempt bonds. Furthermore, he said the service might not be able to find the money to create the databases needed for enforcement. "Until you capture the data, you can't send a revenue agent to check on compliance" said Brand.

More changes are expected

The focus on IRS operations is not likely to wane. Members of both the House and the Senate have said they would like to reduce the number of full-time employees by another 10,000 by 1998. And Senator Robert Kerrey (D-Neb.) has assembled a National Commission on the Restructuring of the Internal Revenue Service to consider, among other issues, making the lRS a private or semiprivate agency. The congressional microscope is focused on the IRS, and more members of Congress are calling for a leaner service and a more efficient tax system. It is likely that this attention will improve the IRS's financial management and operations; however, what is certain is that for the next year the IRS must try to do more with less.

--John von Brachel

The Budget Decline (in billions)

                       Fiscal year    Fiscal year     1997
                         1995            1996         goal

House                  $7.495           $7.512        $6.678(*)
Senate                  7.480            7.309         6.880(*)
Appropriated            7.482            7.348

(*) An additional $174 million from prior-year funds will be added to these totals.