The Internal Revenue Service is at a "critical turning point," National Taxpayer Advocate Nina E. Olson warned Wednesday. She spoke to Forbes after delivering a report to Congress documenting troubling trends at the agency. Taxpayer service is faltering even as the IRS has been ramping up enforcement, is charged with administering ever more social welfare programs including parts of the new health care law and is preparing to impose new congressional-ordered paperwork burdens on taxpayers.  A combination of declining service and more (budget-driven) enforcement by the IRS in the mid 1990s led Congress in 1998 to overhaul the IRS, ordering 72 new taxpayer rights and protections. Those changes ended up hobbling the agency's enforcement efforts for years. "We have been down this road before. We need to not do this again," Olson said. "We need to change if we don't want to see another 1998. If we keep cutting service in the way we are, I think we will see real taxpayer problems."  In her report Olson calculates that since 2004, the IRS' funding for enforcement on an inflation-adjusted basis has risen 18%, while the amount it spends on service has declined 7%. That trend is likely to continue if, as the latest Obama administration budget projects, taxpayer service funding falls another 7% over 2012 and 2013, while enforcement spending rises 14%. One problem, notes Olson, is that Congress' arcane budget rules allow the IRS to request more money for enforcement, but not for service, without breaching certain budget ceilings (That's because enforcement spending, but not service, is counted as raising revenue; Olson argues good taxpayer service encourages compliance with the law and thus brings in more money, too.)  Even as funding for service has declined, Congress has adopted multiple IRS-administered stimulus and benefit programs. These include the Economic Stimulus Payments, the Making Work Pay credits and the First-Time Homebuyer credits. All have generated taxpayer confusion and a need for more taxpayer service, including telephone help. The IRS' goal for this year is to answer just 71% of taxpayers' calls, down from 87% in 2004. (See "Tax Tip: Don't Call The IRS.")  As the IRS has shifted more employees into answering phones, it has fallen further behind on taxpayer correspondence; its inventory of letters to be worked climbed 62% between the end of 2007 and 2009, Olson calculates. In addition, there have been delays in processing some of the new taxpayer credits, including the $8,000 First-Time Homebuyers credit, which was supposed to get cash to buyers quickly.  Meanwhile, with the recession and the bigger IRS enforcement budget, the number of collection actions against delinquent taxpayers has surged. Since fiscal year 1999, the number of liens the IRS issues annually has increased 475% while levies have gone up 600%. Yet at the same time, the amount of inflation-adjusted revenue such collection efforts bring in has actually declined. Olson argues that since liens can destroy taxpayers' credit scores, businesses and job prospects, they can be counterproductive and shouldn't be issued automatically. (For more on liens, click here. )  Particularly worrisome to Olson: All this is happening at a time when Congress continues to order the IRS to administer more social welfare programs that (if done right) will require intensive taxpayer help. Before 2001, the IRS' main task in this area was the earned income tax credit, which allows low-income workers who don't actually owe any income tax to get money back from the government. Now the IRS is handing out refundable or partially refundable credits for college, adoption and home buying, too. As part of the health reform passed in March, the IRS will have to calculate who is eligible for health care subsidies, as well as to collect penalties from those who are judged financially able to buy insurance and don't do so.  The IRS now is studying how much it needs to implement the health care program. (Congress has yet to give it any money.) Olson said she is urging IRS brass to ask for enough cash to run the program right and to redefine the agency's mission, acknowledging that it is now both a social benefits administrator and a tax collector. Those two functions take different skills and mindsets, says Olson, an attorney who represented low-income taxpayers before being appointed National Taxpayer Advocate in 2001.  Olson's report sounds yet another alarm: A new 1099 information reporting provision in the health reform law could burden small businesses, including the self-employed. Under prior law, a business paying any unincorporated service provider (such as a consultant) more than $600 in a year had to send a 1099-Misc to both the IRS and the provider. (For more on 1099s, click here.) Under the new law, all businesses, governments and charities will have to issue 1099s to all vendors of both goods and services, whether those vendors are incorporated or not, if they pay them more than $600 in a year. This obligation will begin with payments made in 2012.
Taxpayer advocate warns service is suffering, while enforcement and taxpayer burden are increasing. She sees parallels to 1990s.