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First Impressions: The Administration’s FY18 IRS Budget Proposal

May 30, 2017

The Trump administration has unveiled its fiscal year 2018 (FY18) budget, which provides the IRS $10.975 billion to administer the tax code.

For better or worse, the IRS has grown accustomed since FY10 to an annual funding process generally described by adjectives ranging from “challenging” to “miserable.”

From a peak of $12.1 billion in FY10, the budget appropriation has fallen to $11.2 billion in the current fiscal year (which ends on September 30, 2017).

What does the budget proposal mean?

Let’s start with a caveat: any president’s budget proposal is just that, a proposal. Congress is responsible for drafting, debating, and passing budgets for the various activities of the United States government. The president’s proposal is not simply passed into law, even when both chambers are of the same party as the president.

The agency—and its defenders—argue that the past eight or so years’ lean budgets have forced some difficult resource decisions. Staffing has shrunk significantly, from nearly 94,700 full-time equivalent (FTE) in FY10 to 77,900 FTE in FY16, and the agency has tightened its belt by, among other things:

  • Reducing compliance activities
  • Eliminating walk-in sites
  • Reduced telephone levels of service (LOS), particularly outside of filing season
  • The IRS commissioner reported a 76 percent LOS for the past filing season.
  • In FY16, total LOS was 53.4 percent, with an average wait time of 17.8 minutes.

If a budget similar to this one is enacted, at a minimum we should expect the IRS to continue dialing back on both taxpayer service and on enforcement. Its budget is approximately 70 percent personnel-related and that reality must drive decision making.

We have two observations:

  • Keeping the IRS’ budget proposal in perspective, the proposed reduction to the IRS—at roughly 2 percent—is smaller than the proposed reductions at nearly all other departments/agencies.
  • The budget document is as much a statement of policy priorities as it is of budget priorities. The president’s budget proposal is an enormous document, and buried within it are several policy focuses of interest to those in the tax arena, including:
  • Simplifying the tax code and providing tax relief: No surprises here, save perhaps the assumption that tax reform will be revenue neutral.
  • Reducing improper payments: While the budget isn’t narrowly focused on improper IRS payments, one must wonder how this effort will be manifested in programs such as EITC and the Child Tax Credit.
  • Increasing oversight of paid tax return preparers: Notwithstanding the agency’s efforts in 2010-2013 to create and enforce minimum standards, return preparer oversight has had a rocky road. With encouragement from the White House, perhaps this conversation will once again come to the fore.

Building a budget is a process, and the submission from the administration is the first part of the journey. Given the political realities of recent years—the IRS is deeply unpopular with a significant segment of Congress and under nearly constant budgetary pressure—and the overall priorities of this administration, the agency has emerged thus far in as good a shape as one could reasonably hope.

This budget still prompts many questions. Will Congress grant IRS the authority to create minimum standards for tax preparers? How will the agency balance the need to protect taxpayer data against the need to serve taxpayers online, and how will it ensure that the rights of taxpayers everywhere are protected?

Ultimately, what will matter to tax professionals and taxpayers is not simply the size of the budget, but what actions the IRS takes with that budget.

(Analysis and insights by Bob Kerr)