The Role of the Internal Revenue Service

The IRS is a bureau of the Department of the Treasury. During fiscal year 2009, the IRS processed more than 236 million tax returns and collected more than $2.3 trillion in revenue. The IRS spent just 50 cents for every $100 dollars it collected.

The Mission of the IRS is to provide the taxpayers of America with top quality service by helping you understand and meet your tax responsibilities and to enforce the law with integrity and fairness to all.

In the United States, the Congress passes tax laws and taxpayers are required to comply.

The role of the taxpayer is to understand and meet their tax obligations.

The IRS is supposed to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.

The IRS has four primary divisions:

Wage and Investment Division helps tax payers understand and comply with the tax laws and to protect the public interest by applying the tax law fairly to everyone.

Large and Mid-Size Business (LMSB) Division works with corporations, subchapter S corporations, and partnerships with assets greater than $10 million. These businesses employ a large number of employees, deal with complicated issues involving tax law and accounting principles, and conduct business in an expanding global environment.

Small Business/Self-Employed (SB/SE) Division provides tax education and information to small business and self-employed individuals so they are aware of their tax obligation.

Tax Exempt and Government Entities Division provides customers with help understanding and complying with the appropriate tax laws and applying the tax law with integrity and fairness to all.

The IRS faces many changes over the next five years - The Internal Revenue Service will face major societal, demographic and economic changes over the next 5 years. The IRS will have to address the challenges and opportunities created by these evolving trends.

1. Increasing complexity of tax administration. Each year the IRS must respond to new tax provisions from Congress and adjust to expiring ones. In 2007 alone, 41 provisions expired affecting a wide spectrum of taxpayers. The legislative mandates that the IRS has to deal with often have short implementation periods; these strain management capacity and demand substantial resources. For example, the 2008 economic stimulus package required the IRS to issue rebate payments to over 116 million households at the same time as the tax filing season. Even as the IRS faces these challenges, they must efficiently administer the tax code despite its ever-increasing complexity. To be fair and timely in their response, they must be nimble in their staffing, have meaningful, just-in-time training models in place, and reinforce their commitment to acting quickly.

2. Growing human capital challenges. Thirty-one percent of the U.S. population is over the age of 50, up from 26 percent in 1980. By 2020, this will rise to 35 percent. More than half of IRS employees and managers are age 50 or older – and 39 percent of IRS executives and 20 percent of IRS managers are already eligible for retirement. Replacing these people will be challenging in an increasingly competitive environment for graduates, particularly in critical fields such as IT and accounting. The IRS must grow employees’ and managers’ skills and sophistication, even while more senior people retire. To succeed in the long term, the IRS must focus on attracting and developing skilled employees, even as the existing workforce ages and the agency continues to face stiff competition for new talent.

3. Explosion in electronic data, online interactions, and related security risks. Technologically savvy employees and taxpayers are demanding that government institutions provide them the same level of tools and online capabilities as best-in-class private-sector organizations. As more people gain access to the Internet, and as IT systems become more interconnected, data security concerns rise. Safeguarding data and systems today is much more difficult than it was a few years ago.

This year alone, the IRS has repelled more than 35 million unauthorized access attempts, with about one-third of this malicious activity originating from outside the country.

Data vulnerability is exacerbated by the fact that criminals are increasingly focused on accessing personal financial information. In fact, attempts at identity theft and phishing (i.e., online scams to steal personal data) related to federal income taxes increased more than sevenfold in 2008.

The IRS must become more technologically sophisticated to meet increased taxpayer expectations and maintain data security – modernizing their systems, improving their training, and continually enhancing their safeguards.

4. Accelerating globalization. U.S.-based corporations more than tripled their foreign profits between 1994 and 2004, from $89 billion to $298 billion, with 58 percent of that profit earned in low-tax or no-tax jurisdictions.

Since 1990, the number of multinational corporations worldwide has grown by 20 times to 63,000. U.S. businesses now make wide use of offshoring and outsourcing – often through sophisticated and complex transfer pricing systems. The international community has created the International Financial Reporting Standards (IFRS), a new set of accounting standards that is becoming a popular alternative to the Generally Accepted Accounting Principles (GAAP).

The percentage of Americans’ income originating from foreign sources doubled between 2001 and 2006.

Personal income tax returns also show the impact of globalization. The number of individual Americans paying taxes in another country increased by 30 percent between 2003 and 2005. As taxpayers expand into global markets, the IRS must keep up with their ever-diversifying needs – assessing their international presence and developing the skills and relationships needed to ensure that taxpayers with income abroad pay the taxes they owe.

5. Expanding role of tax practitioners and other third parties in the tax system. Between 1993 and 2007, the percentage of taxpayers who prepared their own tax returns without outside assistance fell by more than two-thirds, from 41 percent to 13 percent.

Use of paid preparers rose from 51 percent to 60 percent, and use of software soared from 8 percent to 27 percent. These trends show no signs of abating.

Between 400,000 and 500,000 tax professionals – including Enrolled Agents, certified public accountants, and attorneys – now operate under the professional guidelines known as Circular 230, and there are others who are outside this regulatory regimen. The IRS must acknowledge the important role of these third-party practitioners in the tax system, and continue to serve them effectively while helping ensure that they meet professional standards and abide by the law.

6. Accelerating change in business models. The business models of tomorrow will be quite different from those of the past, making IRS interactions with business taxpayers more complicated. Already the IRS is seeing a rapid rise in “pass-through” companies, which pass their profits through to their members or shareholders, who then pay the taxes on their individual returns. These companies include sole proprietorships, partnerships, S-corporations and LLCs. The growth rate of these business models is outpacing that of the traditional C-corporation, which, in contrast, pays corporate rather than individual taxes.

Between 1998 and 2007, the annual growth rate for S-corporations and partnerships was 5.9 and 5.2 percent respectively, while C-corporations grew at just over 1 percent. These companies are not necessarily small businesses. Pass-through entities make up 64 percent of all large and mid-size businesses in the tax system.

The IRS must maintain its effort to help taxpayers understand their obligations, continue its focus on identifying and closing tax schemes that develop with these new models, and ensure that taxpayers whose business models are served by different divisions of IRS receive seamless service.