FROM THE OFFICE OF PUBLIC AFFAIRS

The President's budget strengthens the IRS' comprehensive efforts to improve compliance with the tax laws to ensure that all taxpayers pay their fair share, while protecting taxpayer rights. New funding and staffing resources will be focused toward the most significant areas of non-compliance. These new initiatives, along with other major efforts already underway, comprise a comprehensive strategy to ensure the tax laws are administered fairly by helping taxpayers understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

There are three key proposals in the budget aimed at improving the fairness of tax administration and compliance. The first proposal focuses resources on high-income taxpayers and businesses in areas where noncompliance is likely to be greatest. The second proposal permits private collection agencies to support the IRS' collection efforts while affording full protection of taxpayer rights, allowing the IRS to devote resources to more complex enforcement and collection issues. The third proposal strives to improve the effectiveness of the Earned Income Tax Credit (EITC) program by ensuring that benefits go to those who qualify for them.

"Americans' sense of fairness dictates that all taxpayers should pay their fair share," stated Pamela Olson, Treasury Assistant Secretary for Tax Policy. "The President's budget for the IRS will target the real problem areas in a fair and even-handed manner, restoring confidence in the tax system for hard-working taxpayers. At the same time the IRS goes after those who cheat, the IRS must provide better service to law-abiding taxpayers and respect every taxpayer's rights. It can and it must do both."

Olson continued, "These new proposals are part of Treasury's comprehensive strategy to ensure fair and effective enforcement of the tax laws. It includes stable funding for the IRS, refocusing attention on the most serious compliance problems, aggressively combating abusive tax avoidance transactions and schemes, better detecting new areas of non-compliance through measures like the National Research Program, and simplifying the tax code."

Targeting Non-compliant High-Income Taxpayers and Businesses

The President's budget provides $133 million of new funding to focus and target resources and staffing toward the most significant areas of non-compliance by increasing the number of examinations of high-income taxpayers and businesses in areas where the risk is greatest. Many high-income taxpayers and businesses have participated in abusive tax avoidance transactions. Some have hidden their income offshore. By focusing resources on these cases, the IRS will get a greater return on its investment of resources. It is expected that the number of audits in this category will increase by 72%.

The IRS has identified the following as some of the most serious compliance problem areas: (1) the promotion of abusive tax schemes; (2) the misuse of devices such as trusts and offshore accounts to hide or improperly reduce income; (3) the use of abusive corporate tax avoidance transactions; (4) the underreporting of income by higher-income individuals; and (5) the failure by employers to file employment tax returns and pay large amounts of employment taxes.

Improving the Collection of Unpaid Taxes while Protecting Taxpayer Rights

There is a significant and growing backlog of cases involving individual taxpayers who are aware of their tax liabilities and simply do not pay them. Currently, over $13 billion in  delinquent tax liabilities are going uncollected because the IRS cannot continuously pursue every taxpayer with an outstanding liability. This is unfair to every hard-working American who has paid his or her fair share of taxes. To address this problem, the President's budget proposes to support the IRS' collection efforts with private collection agencies that will engage in specific, limited activities, allowing the IRS to concentrate its resources on more complex cases and issues. By eliciting the assistance of PCAs, the IRS expects to be able to handle more collection cases at an earlier stage in the process -- before the accounts become stale and uncollectible. PCAs have proven successful with over 40 states and have been used for many years with other federal programs. PCAs would hold no enforcement power. PCA employees would be subject to all the same rules that apply to the IRS governing taxpayer rights and confidentiality. Consequently, taxpayer protections would be unaffected. The IRS would be required to closely monitor the activities and performance of the PCAs to ensure these rules are followed.

Improving the EITC

The EITC program is aimed at rewarding work and helping families out of poverty. The EITC lifts nearly 4 million people, especially single mothers, out of poverty each year.

However, the current error rate for the EITC program is too high. In 1999, between 27 and 32 percent of EITC claims -- or between $8.5 billion and $9.9 billion -- were paid in error. EITC has been consistently listed among high-risk federal programs. Congress has recognized this by providing a separate appropriation that has been used for EITC enforcement.

Unlike certain other federal benefit payment programs administered outside the tax code, there is currently little eligibility verification before EITC payments are made. The high number of erroneous claims are difficult to retrieve after the fact and require significant additional resources to recover.

As a result, the FY 2004 Budget requests an additional $100 million to begin a new strategy for improving the EITC program. The IRS will begin to use an integrated approach to address potential erroneous claims by identifying cases that have the highest likelihood of error before they are accepted for processing and before any EITC benefits are paid. A key part of this strategy is to begin certifying taxpayers for the EITC. The IRS will seek to minimize the burdens on taxpayers by using existing databases and other sources of information to verify eligibility in advance.

This integrated approach is designed to provide far greater assurance that EITC payments go to the individuals who qualify for the credit, without sacrificing the goals of the EITC program.

IRS Funding

The President’s FY 2004 Budget increases the total IRS budget by 5.25% to $10.437 billion.