IRS cuts could have affected tax practice.

Last-Minute Appropriations Agreement Saves IRS and Practitioners

In the last few days before the start of the October 1 fiscal year, Congress relented on its proposed IRS budget cuts and funded the Service at a reduced (but probably adequate) level. This was surprising, as both houses of Congress had separately proposed more severe spending cuts than were finally agreed upon. The House had propose $6,679 million and the Senate $6,880 million, the final appropriation was $7,043 million, down from the $7,348 million appropriated last year.

This $305 million cut, while less severe than it might have been, is still a significant reduction. Appropriations are in real dollars, and if we assume a 4% inflation rate, the actual effect in terms of required program reductions is nearly $600 million. The Administration had asked for $7,995 million to cover Federal pay raises and other required cost increases, and to fund important program. A major portion of the cuts is in the Tax Systems Modernization (TSM) area, but other areas will also be

Editor's note: This department is written by the AICPA Tax Division's professional staff. It is designed to heighten awareness of the Divisions work and keep readers apprised of Tax Division activities involving tax policy, technical issues and other practice support matters.

Mr. Stromsem's views, as expressed in this column, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation. trimmed back, hopefully in a way that will not affect service to taxpayers and their representatives too severely.

Facing real cuts in some IRS programs and service, and having barely avoided much more extreme cuts, practitioners should be aware of the extent to which their interests are directly tied to the Services budget. They need to be concerned about the effect of IRS bashing coming from all segments of the population and from both political parties. They should support efforts to deal with the root problems that engender this hostility towards the IRS. Note: This column was prepared in anticipation of the more drastic cuts proposed by the House and Senate; it was intended to inform practitioners and prepare them for lower levels of service as they worked with the IRS. While the effects of the cuts will not be as severe as portrayed in the column, there will be some current reductions in service. And continued budget cuts could ultimately result in these effects at some time in the future.

The IRS Under the Appropriations Bill That Almost Passed

Approximately 5,000 employees, or 5% of staff (according to the IRS), could be eliminated next year through early retirements, buyouts or reductions in force (RIFs). This process will begin in the new fiscal year, with RIFS commencing in January and continuing in March. According to Phil Brand, former IRS Chief Compliance Officer, since approximately half the added revenue and penalties comes from large case audits, the IRS will continue to staff this compliance function. The returns processing function will be maintained, since the only contact most taxpayers have with the Service is when filing their returns, for the most part they will be unaware of the budget cuts. Service Center operations often bear the brunt of such budget cuts, since they are staffed with a large number of seasonal and temporary employees.

IRS employees will be in turmoil. Staff hours and energy will be expended on dealing with rumors and realities that challenge job survival instincts. Those forced to leave will be working on resumes and trying to land on their feet outside the Service, with the depressing effect of job and economic loss weighing heavily on everyone (whether leaving or not). Those who stay will have more work, and may have to adjust to new and different work. It will be difficult cult to keep morale high when the IRS is being bashed by politicians from both parties and at all levels, and there is talk of "pulling the IRS out by its roots" and "ending the IRS as we know it."

Many experienced senior staff will be eligible for buyout or early retirement opportunities. The IRS may find that many senior staff members may take advantage of these offers, the more able junior staff may leave the Service for other careers, and new staff will be difficult to recruit in such an environment.

The failed TSM effort was the lighting rod that attracted current congressional attention to the Services operations, with Congressman Dan Lightfoot comparing the system designed by the IRS to a newly built home in which switching on the living room light results in the upstairs toilet flushing. The Service's decision to undertake such a massive systems modernization in-house was probably wrong, but the work needed to be done. The IRS still uses antiquated tape systems for performing much of its work. Also, according to Brand, items in the TSM area of the budget that will be cut do not just involve programmers, but include telephone modernization, the integrated collection system, notebook computers for revenue agents and operating personnel. With severe cutbacks in this area, many TSM employees will lose their jobs.

Tax Practice Under the Appropriations Bill That Almost Passed

In general, IRS tasks that are more labor intensive will be more difficult to accomplish. With returns processing and large case audits protected, smaller companies or individuals with special problems will have fewer resources assigned. Planned improvements in telephone service will be delayed.

Fewer notices will be sent out, meaning less representation work for CPAs. What business will remain will be more difficult for CPAs to deal with efficiently, since it often will require the focused attention of an IRS employee (which will be more difficult to get). As IRS employees become overloaded, there is the potential that more telephones will be left unanswered, voice mail and other messages will not be returned, and appointments will be unavailable. While even simple tasks will take longer, it will be difficult to bill clients for this time-they expect us to be able to work efficiently in dealing with the Service.

The IRS staff with which CPAS work will be smaller, and may be less experienced and less capable than we are accustomed to. In addition, they may be preoccupied with survival in a troubled organization.

To maintain a level of compliance, Congress may be tempted to abuse the CPA-client relationship and deprive the taxpayer of independent tax counsel by requiring return preparers to perform audit-type procedures, either directly (as was done with proposals for verification of automobile logs) or indirectly (by increasing the amount and lowering the thresholds for asserting penalties for aggressive tax return positions).

With reduced IRS compliance efforts and with the tax system being popularly criticized, our clients may resent our careful and professionally responsible compliance work. As those who are less inclined to comply pay less in taxes, those represented by CPAS may end up carrying a greater share of the tax burden.

The IRS budget cuts do not make sense from an economic standpoint. The Services budget is being cut more than most other Federal agencies, and lost revenues from tax collections will almost certainly exceed the modest budget savings. With fewer staff members, thresholds for compliance measures will become more relaxed. Even jobs that are primarily computer driven, such as document matching, require employee hours to handle taxpayer responses, and will be cut. With the possible net loss in revenue as well as reduced services, some Service personnel have suggested privately that the cuts are intended to cause the agency to fail, so that there will be yet another reason to justify a new tax system. While this may smack of paranoia, it is difficult to understand these cuts from a purely budgetary standpoint, and at least some of the motivation would seem to be election-year IRS "bashing."

Conclusion

Although the AICPA has often criticized the Service when it has been heavy-handed or overly intrusive (such as with its financial status audit program), there is little opportunity for enlightened administration when dollars and staff are cut to the extent of the House and Senate proposals. The Institute regularly testifies in support of the IRS budget, because we believe the Service must be funded adequately to do a professional job. In addition, the AICPA has established a task force to work with the National Commission on Restructuring the IRS.

Many in Congress and the public seem inclined to shoot the messenger that brings complexity and perceived high taxes, rather than change the message. Collection of taxes is a necessary part of government-at least as necessary as the spending side-but tax collection has never been very appreciated. The problems with our tax system today result more from complexity and the perception of high taxes in relation to what taxpayers receive from the government than with the IRS itself. When we cut back the resources provided to the Service, we are doing so in frustration; in the long run, this will only result in more frustration. What is needed is a simpler tax law that is easier to administer, and an overall fiscal system for our country that does not appear to be so unfair. Only at that point will we again have a self-assessment system of taxation that we can be proud of, and that will once more place the Service in the role of a collector of taxes rather than an enforcer of difficult and burdensome rules.