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A letter to the profession.

In the October 1996 issue of the American Institute of CPAs tax division newsletter, Michael E. Mares, chairman of the Institute's tax executive committee wrote, "We expect the Internal Revenue Service to do its job in a professional manner but also expect it to have sufficient funding to do so." He is absolutely right. I could not have said it better myself.

Lawyers and accountants may quibble about the meaning of words like professional and sufficient, but the stark reality is that big cuts in the IRS budget will inevitably have a negative impact on our customers. Frankly, the biggest challenge this agency faces is how to minimize that impact.

In the past several years, the IRS has launched initiatives that allow us to provide more and better services with fewer resources. When someone accesses our Internet Web site, (http://www/ rather than calling us for tax assistance and forms, taxpayers are served more effectively and the IRS saves money. When IRS notices are rewritten in clearer language and millions of other notices are discontinued, there is a similar mutual benefit.

We have made comparable efforts to make things easier for taxpayers who face more complex issues. The so-called check-the-box rules offer a quick way for entities to elect whether they want to be considered corporations or partnerships. Advance pricing agreements offer a growing number of multinational corporations a simplified way to deal with transfer pricing on a prospective basis. Reaching such agreements is admittedly more difficult than simply accessing our Web site, but it is much easier than negotiating--or even litigating--with the IRS after the fact. And it is mutually beneficial.

Such initiatives will not solve all of our problems. And they are not free. Creating a Web site or rewriting notices requires a diversion of resources that could otherwise be used to serve taxpayers directly. From our perspective, that often is a good investment. But declining budgets limit our flexibility. We cannot afford, for instance, to simply stop answering the phones or take a month-long audit holiday to free the resources needed to create successful new products.

In other words, to paraphrase a cliche popular in the private sector, often you have to spend money to become more efficient. If current trends continue, we worry that we will not have enough money. Not only will that create additional stress within the IRS family--as we try to shift people where they are most needed--but it also will lead to service curtailments and customer frustration. At a time when we are working hard to increase customer satisfaction, that is a step in the wrong direction--one that will prove hard to reverse.

We are proud that that has not happened so far. But we are afraid our response has led some of our critics to the wrong conclusion. We have made some short-run compromises that will impose long-run costs. In the fiscal year ended September 30, 1996, for instance, we avoided furloughs--which would have been disruptive to the entire tax community--by imposing a virtual freeze on most training. As a result, today's IRS is marginally less well trained that it could have been--and than we believe it should be.

Few people will notice the difference. But continuing this policy for several years will take an intolerable toll. That's why we are not going to do it. This year we made the painful decision to actually reduce our workforce to free up the funds needed to provide appropriate training and resources for IRS employees who remain on the job. Terminating personnel was not an easy decision, but it was the only one possible as part of our strategy to minimize the negative impact budget cuts will have on our customers and ensure that we can accomplish our mission in a professional manner.

Some critics who are not particularly knowledgeable about tax administration issues view the budget cuts as a step in the right direction. Not only do they see any reduction in government spending as a positive sign but they also believe IRS budget reductions will require us to curtail some activities, such as audits. In fact, they are wrong.

Our first priority is to guarantee that budget cuts do not yield reduced tax collections. So when faced with a clear choice between compliance and customer service, compliance will win every time. In other words, we will provide as much compliance coverage as is required; that means there will be less free tax counsel available on a prospective basis that could help taxpayers get things right initially. I hope this choice will not have to be made too often, but it is a reality we live with. In recent years, we have worked hard at the IRS to improve customer service in the belief that it will reduce future compliance problems. And we also have made real strides in making the compliance program more cost-effective.

But when we are faced with the tough choice between the two, our priorities are clear.

This should not suggest that either I or the IRS is opposed to change and long for a sleepy existence where the habits of the past become the procedures of the future. To the contrary, we solicit change--and often embrace it. But not all change is for the better. Change driven by unpredictable budgets is particularly difficult to manage. One need look no further than our truncated 1995 compliance initiative to see why.

Several years ago we persuaded Congress that it had to spend money to make money. To that end, we pledged to increase revenue if they provided us with additional resources. The compliance initiative was an investment with a predictable payback. Congress agreed to give the IRS an extra $2 billion over five years and we committed to increasing revenues collected by $9 billion--a payback ratio of better than four to one.

Regular progress reports were built in to make sure the investment was yielding the anticipated results. In the first year, we pledged to collect an additional $331 million. More than double that amount, $803 million, was successfully collected. There is no reason to believe we would not have been equally successful at achieving subsequent targets.

The basic five-year plan called for approximately 5,000 additional IRS employees who would focus their efforts on collecting taxes that would otherwise go unpaid. Not surprisingly, up-front recruitment and training costs yielded a projection that called for maximum returns at the end of the program.

The five-year program ended after only one year. The IRS more than kept its promise. While Congress was sympathetic, it found new, broad budget caps precluded continued investment. So the program was killed in its infancy. In retrospect, it was a good investment, but not nearly as good a one as it would have been had it run for the full five years.

In the past several years, the IRS has proven it can become more efficient, but there are limits. Ultimately, you get only what you pay for. If everyone could agree on that simple conclusion, I think there would be broader agreement about precisely how much we can do with a given amount of money.

Of course, there are many things we can do to build a stronger relationship with taxpayers that do not cost money. Administratively extending the Taxpayer Bill of Rights and strengthening the role of the taxpayer ombudsman was one example. Trying to come up with a fairer way of dealing with innocent spouses who become involved in tax cases is another. And soliciting tax community views--including yours--on our training materials that explain how to deal with worker classification issues is a third. I am confident you will see more such initiatives in the future.

But ultimately, money is always a constraint. The Internal Revenue Service and the American Institute of CPAs have a candid and constructive relationship. We don't always agree on everything, but we share a belief that starving tax administration is a step in the wrong direction. We at the IRS appreciate your leadership on this important issue.
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Title Annotation:from IRS Commissioner Margaret Milner Richardson
Publication:Journal of Accountancy
Article Type:Transcript
Date:Nov 1, 1996
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