The IRS Advisory Council—or IRSAC, an advisory group for the IRS—said in its annual report last week that the tax agency needs adequate funding to operate efficiently, adding that it should expand its voluntary correction programs.
In its report, IRSAC said reducing the agency’s budget “constrains IRS effectiveness and efficiency, which results in taxpayers’ loss of respect for the agency and our voluntary tax system.”
“IRSAC is very concerned that prior year and proposed budget cutbacks have so diminished IRS effectiveness that most taxpayers are now experiencing increased compliance costs,” IRSAC said in the report. “This undermines the voluntary tax system, reduces government revenues and promotes the underground economy. The IRS must be provided sufficient resources to continue to operate as a world-class financial institution while maintaining the integrity of our voluntary tax system.”
The report also said the IRS should continue to expand its voluntary correction programs to help taxpayers with self-reporting prior year noncompliance.
“Our federal tax system…relies upon annual income tax returns filed by taxable and nontaxable entities…” the report said. “Generally the taxpayer, rather than the government, has the necessary information to determine the tax liability. Enforcement relies on the information that taxpayers provide, and the IRS needs to facilitate voluntary compliance.”
IRSAC recommended that the IRS issue administrative guidance and revise its manual to allow closing agreements to be entered into to correct underreporting errors by having the party responsible for the error pay a negotiated amount approximating the tax liability that would have been paid if the error had not occurred.
Additionally, IRSAC recommended that taxpayers be allowed to amend the tax return for the year of the error or include corrected income amounts on a special schedule for the current year’s filing.
“It is readily apparent that the IRS is continually required to ‘do more with less’ resources while operating in a complex, ever-changing environment throughout the world,” the report said.