The Trump Administration released its FY 18 budget, a budget that is generating a great deal of controversy due to unrealistic assumptions and for its slashing many entitlement programs. Since early days on the campaign the President has emphasized the need to control for errors and fraud in transfer programs. IRS has been a poster child for improper payments, and it is no surprise that this budget addresses that issue.
read more...The document entitled Analytical Perspectives to the budget seems to contain most of the context and description of the assumptions and additional detail. Starting at about page 99 is a discussion of the need to ensure greater integrity in federal spending programs. While I have not read line by line the budget materials there are two measures in the budget that stand out for possible impact on tax administration: oversight over tax return preparers and expanded IRS math error powers. The former in my view is a great idea and the latter not so much.
The budget requests “authority to increase [IRS] oversight over paid preparers.” As the Administration states, “[i]ncreasing the quality of paid preparers lessens the need for after-the-fact enforcement of tax laws and increases the amount of revenue that the IRS can collect.” We have discussed this issue numerous times in PT. Increasing accountability and visibility of unenrolled preparers is on balance good for taxpayers and tax administration. The most recent IRS compliance study pegged unenrolled preparers as having the highest error rates on EITC returns, and while regulation is not a panacea, requiring minimum standards and directly bringing those preparers into the Circular 230 fold is a way to discourage preparers and taxpayers from acting as if the tax system is an unwatched cookie jar and to encourage preparers to act as gatekeepers.
The second proposal in the budget is a call to expand IRS power to essentially use math error summary assessment powers:
[W]ith this new authority, the IRS could deny a tax credit that a taxpayer had claimed on a tax return if the taxpayer did not include the required paperwork, or where government databases showed that the taxpayer-provided information was incorrect.
I understand the reasoning behind this proposal. EITC exams already hover at about 40% of all IRS exams and while IRS does these exams mostly on the cheap through correspondence, TIGTA has estimated that it still costs IRS on average about $400 for each correspondence exam. Yet the problem with the proposal is that the underlying information in many of the federal databases is not reliable enough to justify dispensing with the normal due process protections of pre-assessment notice and defined right to Tax Court review. For example, HHS maintains database on child custody but millions of lower income individuals do not have formal custody arrangements or even if they do the databases are not reliable enough to warrant automatic rejection. In addition, GAO and others have criticized past IRS administration of its math error powers, an issue that is particularly pressing if individuals rely on the claimed credit to meet basic needs.
While IRS is still an efficient administrator of refundable credits (even accounting for program error costs per $ of benefit are very low relative to other means-based benefit programs), Congress would be better served recognizing the limits of IRS ability to verify eligibility and provide additional resources to do its job properly rather than look for ways to do its job on the cheap and on the backs of the beneficiaries.
While many observers have labeled this budget dead on arrival, tax proposals and tax administration proposals often have nine lives. The theme of reducing errors and saving money through increased compliance will be recurring over the next few years, and that will likely lead to proposals like these that if enacted could mean significant tax administration changes.
About Leslie Book
What we are talking about here are drops in the bucket and rounding errors.
The proposal to regulate tax preparers is estimated to save $35 million a year by FY 2020.
The proposal to give IRS more math-error authority is estimated to save $64 million annually by FY 2020.
Those numbers take into account the estimated drop in collections that result from implementing them. Presumably, this means fewer returns filed and less tax collected. The tax preparer regulation will cut revenues by $20 million a year. The “math error” authority will reduce federal income by $11 million a year.
An F-35 costs more than $100 million, not including the engine.
The FY 17 budget enacted earlier this month included $61 million for local law enforcement officials to provide security for Presidential visits to locations like New York and Florida.