Internal Revenue Service in Tax Administration Research Paper

Introduction

Income tax means imposing or levying the proportionate rate upon the income earned. Government is empowered to levy upon the income of the individuals. “The tax under consideration has a base which includes all net gains” (Rolph, 1954, p.260). This is so done for ensuring the economic development and betterment of a country and its citizenry as well. Because, Paler (2007) states that “a state’s ability to collect revenue has long been recognized as essential to its growth and development” (p. 2).

As it is mandatory upon every citizen to pay due regard to the law of the land, everyone is bound to abide by the provisions regarding tax legislation of the country while income earned from different sources by rendering services. Individuals of a particular country are levied as per the existing tax laws and regulations. Though Corporations are not levied, the proportionate shares of stockholders in corporate earnings are subject to tax. Stockholders are treated as if they were partners for tax purpose.

Proper monitoring and management of tax administration helps the country to conduct its functions effectively and smoothly. The tax functionaries of the United States of America are regulated through the Internal Revenue Service (IRS). Hollis (2004) shows that “[i]n 2002, the Internal Revenue Service (IRS) processed almost 227 million tax returns, collecting more than $2 trillion in revenue, and it helped almost 95 million taxpayers who called the toll-free automated line, wrote letters or visited one of its more than 400 offices around the nation”.

Purpose and Scope of the Study

The Internal Revenue Services (IRS) is the central body entrusted with the responsibilities of executing, monitoring and supervising the revenue administration in the USA. This statutory body was established through the Internal Revenue Code (IRC). The central theme of the present study is concentrated on explaining the philosophical outlook and practice of public administration corresponding to the Internal Revenue Service (IRS).

In this view, the study demonstrates to discover the role of the Internal Revenue Service (IRS) in regard to its functions in contributing to preserve the notion of public administration. Henceforth, the present study intends to highlight on the following topics: philosophy of public administration, environment of public administration, administrative ethics, nature and process of policy making, decision making, organizational structure of the IRS, leadership and management of the IRS and other relevant matters to develop a structure over IRS.

In addition, the study would also attempt to explore the defects and loopholes in the operation and management of Internal Revenue Service (IRS) and recommend practical suggestions and way out for its more effective operation and help preserving the notion of public administration and serve the peoples’ maximum interests as well. The findings of the study would widely facilitate the policy makers in arriving at the right decision and accordingly shape a fit revenue administration for the country.

Methodology

This is an analytical as well as empirical study with a view to exploring the deficiencies and impediments in the way of effective operation and management of the Internal Revenue Service (IRS). So, the Researcher in order to properly evaluate the merit of the study has taken an extensive approach. Accordingly, Researcher has taken help from various sources. Particularly, emphasis has been put on the thorough study of texts and journals. In addition, to upgrade the quality of the paper, it has been made informed with the information taken from the internet.

Internal Revenue Service (IRS)

The Interval Revenue Service (IRS) was established with the auspices of the Internal Revenue Code. It monitors, oversees and manages the entire revenue affairs of the country. A study (Snyder, 1952) shows that “[p]rior to the reorganization of 1952, the Internal Revenue Service (IRS) collected the revenue through ‘64 Collectors’, who were Presidential appointees. Congressional investigators found that the Collectors had been susceptible to political influence and to other forms of improper pressure. Commissioners had found they were unable to control the independently-appointed Collectors” (p. 221).

The centralization of the taxation system was mostly liable for this problem. The Select Committee report (Final Report, 1976) states that “[t]he problem was perceived in part as one of excessive centralization, which made the Internal Revenue Service (IRS) a powerful tool of political forces and threatened public confidence in the tax system.” So, decentralization of The Internal Revenue Service was necessitated for certain needs of tax collection and tax law enforcement.

The Select Committee report (Final Report, 1976) shows that “The high degree of local autonomy and agent discretion which accompanied decentralization has made the Internal Revenue Service (IRS) an effective tax enforcement agency. It has, however, proved to make difficult the effective control of non tax law enforcement activities”. Recently, several defects and loopholes have been found in the operation and management of the Internal Revenue Service (IRS).

So, over the days, there has been a growing debate as to the merit and efficacy of the Internal Revenue Service (IRS). Policy makers and citizens are worried regarding the effective operation of the Internal Revenue Service (IRS). The agency is riddled with various problems. Delmar (1998) shows that “[e]very year over 100 million taxpayers have an (e.g., Treasury General Counsel Order No. 4) obligation to compute and report their income and tax liability to the Internal Revenue Service (IRS). But millions either fail to file returns or file inaccurately” (p.13).

Use of Force

It is alleged that Internal Revenue Service (IRS) officials pressurize their sub-ordinates to extract more revenues from the taxpayers by means of force and coercion. “In fact, congress encourages Internal Revenue Service (IRS) officials to do so” (Rainey, and Thompson, 2006, p.1).

Tax Gap

Tax gap in America is a common scenario. “National Research program undertaken by Internal Revenue Service (IRS) suggest that in 2001 around 16.3% taxpayers did not pay their taxes worth $345 billion” (Rainey, and Thompson, 2006, p. 575).

Organizational Structure

There were various organizational problems at the Internal Revenue Service (IRS). Amongst other, the major difficulties were the inadequacies of telephone services, politically motivated and inexperienced personnel in and complicated tax legislations.

Form 990

One of the defects in the existing tax mechanism is that the Form 990 information return filed by tax-exempt organizations has not changed since 1979. Of Course, In 14 July, 2007 the Internal Revenue Service (IRS) recommended a discussion draft for redesigning the form emphasizing the necessity of ensuring transparency and smooth organizational operation of the Internal Revenue Service (IRS).

Taxation in the USA

Personal Income Taxation

Law does not allow avoiding taxable income. Section 6151 of Internal Revenue Code states, every taxpayer should submit their payment with tax returns. Otherwise, anyone on the charge of avoiding tax would be convicted with criminal penalties. As it is the ethical responsibility of citizenry to regularly pay tax to the exchequer, avoiding tax thus meant overruling the esteem of law of the land. In United States v. Drefke, (1983) case, Eighth Circuit Court of Appeals held, “when a tax return is required to be filed, the person so required ‘shall’ pay such taxes to the internal revenue officer with whom the return is filed at the fixed time and place.

The sections of the Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the… tax, a duty which he chose to ignore”. Levying tax depends upon the gross income of a citizen. Gross income includes all sorts of earning obtained from different sources through rendering services. As per section 61 of Internal Revenue Code, any income, from whatever source, is presumed to be income, unless the taxpayer can establish that it is specifically exempted or excluded.

Section 61 of the IRC states that gross income means all income from whatever source derived. Personal income taxation has strong connections with the formation of human capital, the choice between labor and leisure, the investment decision, the compliance and evasion of legal rules, and the geographical location of resources. The Internal Revenue Code imposes a federal income tax upon all United States citizens and residents. Again, in Brushaber v. Union Pac. (1916) case, court held, the United States Supreme Court has recognized that “sixteenth amendment approves a direct non -apportioned tax upon United States citizens throughout the nation, not just in federal enclaves.”

System of Taxation

US follow the status of residency or citizenship in order to levy taxes on its people. “One’s residency status determines which U.S. tax return has to be filed. In USA, in regard to determining the tax rate, following two matters are given considerations (i) green card test; (ii) Substantial presence test, i.e. status of the citizens. Hence, the authority in levying tax, duly evaluate following things: whether the taxed individual is a non-us citizen or Resident alien i.e. a person regulated under either tax law residency test or Non-resident Alien, i.e. a person who is not under the ambit of either tax law residency test.

In case of levying tax upon citizens and residents, The Internal Revenue Service (IRS) determines the rate on the basis of their worldwide income. Furthermore, U.S. citizens and resident aliens are generally taxed in the same manner although there are a few exceptions” (Faussett). However, non-residents are levied only on U.S.-source income and are allowed only limited deductions and credits. A non-resident alien is generally levied at a flat 30% rate on U.S.-source investment income, For example, a U.S. citizen, but a resident alien does not include in income compensation earned as an employee of a foreign government or international organization and that is received for official services rendered. Whereas income, that is effectively connected to a U.S. trade or business is taxable at graduated rates.

Again, a foreign-born spouse of either a U.S. citizen or resident alien holds no special status except for being able to elect to be treated on the tax return as a resident alien. This enables the couple to file a joint tax return. It is important to point out that an illegal alien is subject to the same income tax rules as a legal alien. The substantial presence test must is applied to determine whether the individual should be levied as a resident or non-resident alien (Faussett).

Reform: Rossotti Period

For decades long, the Internal Revenue Service (IRS) had not changed its enforcement and revenue functions of the country. So, the agency could not properly administer its activities. Thus, inefficiency and mismanagement in the Internal Revenue Service (IRS), led the congress to adopt a reform commission in 1996 and legislate an enactment entitled “Internal Revenue Service Reform and Restructuring Act of 1998 (RRA 98)” for the efficient tax administration in the country.

This act introduced major reforms. The Internal Revenue Service Restructuring and Reform Act of 1998 mandated that the agency would provide top-quality services to the taxpayers or citizens of the USA by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. The new organizational framework introduced by Rossotti and Department of Treasury, reflects a balancing approach between taxpayer service and tax enforcement activities.

The reform emphasized on improving taxpayer support, outreach and education. Rossotti (Rainey, and Thompson, 2006, p. 602) deserves a handful credit for his efforts in centralizing Internal Revenue Service (IRS) phone operations. His administrative reorganization has obsolete the old decentralized regional and district office structure. The new Internal Revenue Service (IRS) structure was equipped with four new operating divisions, emphasizing on service and support for taxpayers. In addition, the newly developed Internal Revenue Service (IRS) manual defined 10 offenses providing that Internal Revenue Service (IRS) officials would be punished in committing any of those 10 offenses regarding the enforcement actions.

Of course, the reform proposal also provided provisions against those resisting the enforcement actions. The reform introduced by Rossotti is important for following two considerations: a. A reorganization that supported a more strategic approach to tax which promoted prospects making progress in eliminating the tax gap, b. a reorientation of agency managers to broader measures of the agency’s performance (Rainey, and Thompson, 2006, p. 602).

The significance of Rossotti’s reform is laid in making change in the organizational structure of the Internal Revenue Service (IRS). This helps the organization to work more strategically and more effectively so that the Internal Revenue Service (IRS) can attain a long lasting achievement in eradicating the tax gap. The reform has also ensured a higher level of compliance among the low-income taxpayers and thereby helps to reduce the tax gap through VITA (Volunteer Income Tax Assistance) program. In fact, it has erected a mechanism for an effective and successful tax administration throughout the country which has yielded efficiency and expertise among the Internal Revenue Service officials in executing their responsibilities.

Another contribution in Rossotti’s reform was to carry a change in the agency’s mission. Earlier, Internal Revenue Service (IRS) was criticized for confining its activities solely within tax collection and abusing the tax payers. So, concern for improving the citizen’s comfort was urged by the situation and reform initiative stressed on taxpayers’ satisfaction, i.e. delivering quality service.

Undeniably, the reform by Rossoti and his administration has made significant contribution in the Internal Revenue Service (IRS) for simplifying the revenue administration and providing better services to the citizens as well (Rainey, and Thompson, 2007, p. 583).

Impediments

The reform of Rossotti was sharply criticized for weak enforcement of the scheme. But, because of some difficulties, the program could not be succeeded. The major concerns that impeded the reform initiative were budget constraints, the Internal Revenue Service (IRS) Restructuring and Reform Act, and a sharply increasing workload. These were beyond the control of Rossotti’s team.

Budget

Budget or resource constraint severely impeded enforcement actions during the 1997-2002 period. Congress and the president imposed budget constraints that caused the total number of revenue agents and tax auditors from 16,380 in 1997 to 13,046 in 2002.

Flexible Legislation

The Internal Revenue Service (IRS) Restructuring and Reform Act impeded in audit and collection. The law included 71 new rights for taxpayers (Rainey, and Thompson, 2007, p. 580). For instance, earlier, the revenue officers had to provide a 30 days notice to the delinquent taxpayers giving them the opportunity to file a tax lien. But, the new legislation provided more time for each actions (Rainey, and Thompson, 2007, p. 580). Such provision lengthened and complicated the procedure.

Improper Decision

In executing reform initiatives by Rossotti with the Internal Revenue Service (IRS), Congress and the Treasury Department erred wrong, particularly in deciding the case of agency’s already underway reorganization efforts. A completed implementation of a new Master File computer system was called a billion-dollar mistake by the Government Accountability Office (Cyr, and Swanson, 2007, p. 578).

Inclusion of Ten Offences

Another defect was with the Internal Revenue Service (IRS) Restructuring and Reform Act was the inclusion of a peculiar type provision which enunciates that if any Internal Revenue Service (IRS) personnel do any of the ten offences, would be penalized. For instance, the offence of harassing a tax payer was subject to mandatory termination from the service. So, the personnel were worried about their service tenure and enforcement initiative.

Thus, the enforcement initiative was weakened. In this concern, Internal Revenue Service (IRS) officials were required to be reassured regarding their tenure and permanence in the service. As per the relevant Statistics, the number of liens filed by collection personnel reduced from 544,000 in 1997 to 168,000 in 1999. Again, because of the reassurance to the collection employees, the figure was increased to 492,000 by 2002.

Increasing Workload

Increasing workload was another problem. The tax code brought about 293 amendments in the regulation of tax provisions during this period. For those changes, the number of filing tax return rose to 12 million. Again, the tax collection was increased by 527 billion dollars and the figure of tax return was increased to 121 billion dollars. Consequently, the Internal Revenue Service (IRS) had to face a great difficulty in tackling such an increase workload with already lost workforce.

Criticism

Though the reform program deserves success, it lacks serious defects in some cases. Consequently, the program has been severely criticized from several quarters. Critics argue that tax reform program undertaken by Rossotti is defective on the following grounds:

Non-Compliance Data

The purpose of a tax return examination is to rectify the tax return as well as teach the taxpayer regarding the proper application of the law. Consequently, in the subsequent years, tax payers will be able in determining self-assessing tax return. An ideal and well regulated tax mechanism can help Internal Revenue Service (IRS) in reducing the tax gap in the country. Though the program succeeded, due to non-inclusion of tax noncompliance data, the reform was not properly addressed.

Inadequate Computer System

Though, computer system has been introduced, it is still inadequate as the system cannot provide timely and accurate information.

Weak Enforcement

As the reform program was more stressed on customers’ satisfaction, rather than enforcement initiatives, it was very much frustrating in the operational scheme of the organization. So, there was a wide gap between tax owed and collected tax. Consequently, non-compliance rate of the tax payment was increased and stood at 17%.Due to lack of proper enforcement initiatives, the rate of non-compliance was on the rise.

From 1997 to 2002, the adjusted gross income gap rose from 10.9 percent in 1997 to 13.5 percent in 2002. This measure of failure to report income is not consistent with a good outcome record for the Internal Revenue Service (IRS) over those years. Considering this, Mikesell and Birskyte conclude, “Though … the failure to reduce it [noncompliance] cannot be entirely attributed to Internal Revenue Service (IRS) policies during Mr. Rossotti’s tenure … it clearly indicates that the Internal Revenue Service (IRS) did not have much success in improving the level of taxpayer compliance” (Rainey, and Thompson, 2007, p. 579).

In 1997, the Internal Revenue Service (IRS) examined 12.8 returns out of each 1,000 returns filed by individuals, but in 2002 it examined only 5.7 returns per 1,000 filed (Mikesell, and Birskyte, 2007, p. 574). Transactional Records Access Clearinghouse (TRAC). (2005) shows that “[t]he face-to-face audit rate of individual income tax returns fell from 0.6 percent in 1997 to 0.16 percent in 2002”. Transactional Records Access Clearinghouse (TRAC) (2006) states that [t]he percentage of face-to-face audits of returns filed by all corporations decreased from 2.62 percent in 1997 to 0.88 percent in 2002. Employees satisfaction and customer relation with the tax payer did not make any meaningful change for the development of enforcement activities.

Politicization

Initiative has been made in case of pay banding and special salary rates in Rossotti’s unique management approach. Special salary rates have overly politicized the Internal Revenue Service (IRS). The centralization of power and the addition of more political appointees were conflicting with the Hoover Commission recommendations that decentralized the agency in 1954 after many scandals. Again, Rossotti allowed some retiring the IRS executives to retire one day and return to work on the next day in the same job. It is our understanding that Commissioner Everson ended this practice soon after taking office.

Inefficient Contractors

Rossotti spent millions on outside contractors to implement his plan. Due to lack of experiences of those contractors, no commendable improvement has not been ensured.

Organizational Structure

Though, Rossotti deserves credit in reforming Internal Revenue Service (IRS), his organizational structure bears some major defects, one of the major of which was the absence of accountability. Later on, Commissioner Everson has changed the Internal Revenue Service (IRS) structure and has made the system more functional and effective. Under the newly introduced system, experienced and expert officials are invested with the responsibility of tax collection and auditing process. This process is working well because both the processes are complicated and require to be handled with efficient personnel.

Recent Reform

As the Internal Revenue Service (IRS) has been continuously striving to better its service quality for why the agency has recently introduced further reform initiatives in its operation and management services in addition to the earlier reform program designed for making the body as a public demand oriented agency

Electronic Case Processing

Internal Revenue Service (IRS) preserves the notion of facilitating the customer in obtaining information through the use of computer conveniently and easily. Hence, the agency has developed and implemented an electronic case processing system that help in quickly processing an exemption application and has introduced a convenient and cost-free e-Postcard program for organizations in transmitting their annual notice.

E-Post card

Internal Revenue Service (IRS) has introduced e-postcard. The small organizations opening their activities after 31 December, 2006 are entitled to get tax exemption in case of their annual income $25,000 or less. In order to avail this opportunity, the organizations are required to file an electronic notice on Form 990-N so as to afford the Internal Revenue Service (IRS) to access the information available regarding these organizations. To effectuate the program, Internal Revenue Service (IRS) has launched a program to make people conscious about their tax exemption status.

Non-Compliance Data

The Internal Revenue Service (IRS) has exerted to measure compliance of different types of taxes and taxpayers through National Research Program. By this means, Internal Revenue Service (IRS) will provide a statistically valid representation of the compliance characteristics of taxpayers.

Life Cycle Program

Internal Revenue Service (IRS) has launched Life Cycles in its public website in FY 2007. Life Cycles are web-based learning tools that help exempt organizations to apply the tax law at every stage of their existence. In order to meet the requirements of new organization Internal Revenue Service (IRS) has recruited cyber assistant. The function of Cyber Assistant is to help Internal Revenue Service (IRS) in accomplishing its tax exempt status. In so doing, Cyber Assistant will make an interaction between tax exempt applicants and the organization itself (FY 2008). The agency has taken the approach to disseminate information to the tax exempt organization through: educational outreach, websites and life cycle program.

Recommendations

The inherent philosophy of public administration in every country is to provide the common masses invoking the maximum benefits and privileges of public services. As Citizens comfort is the prime consideration, public administration should make continuous effort in delivering better public services to the people. The traditional taxation system of the country could not meet the situation. So, the Internal Revenue Service (IRS) has exerted to ensure better services for citizens satisfaction through its intensive action programs. Now, it is urgently required to develop enforcement activities in the tax administration.

• More training programs should be introduced to educate the personnel as regards their responsibilities, developing leadership and management skill and effective means for enforcing tax legislation for the purpose of improving a better tax administration in the country.
• Provisions should be made so that the Internal Revenue Service (IRS) officials can be free from being pressurized in extracting revenues from the people.
• Data collection regarding tax gap should be developed. At the same time, steps should be taken to reduce the gap and penalize the delinquent avoiding taxes.
• Organizational structure should be remodelled. More improved telephone and internet services should be developed to help the citizens getting available assistance and cooperation. Persons of experiences and expertise should be appointed so as to make the organization effective and ensure efficient service delivery.
• Form 990 should be more developed to facilitate the tax exempt organizations in case of information return filed by the tax exempt organizations and confirming transparency and efficiency.

Recently, The Internal Revenue Service (IRS) has taken a plan to design, develop and deploy a learning content management system (LCMS) that would allow the employees of the Internal Revenue Service to “view training progress, request training electronically, and launch web-based training. There are also long term plans for Internal Revenue Service (IRS) to explore strategic integration with other internal legacy systems and implement a Learning Content Management System to better manage learning content” (U.S. Office of Personnel Management, 2005). It has made an epoch making change for aspiring better change in regard to taxation in the coming days

Conclusion

Revenue collection or tax administration of a country is important for its sound economic development. The success of an ideal tax administration depends upon the fiscal policy of a country. The current revenue administration of America does not meet the demand of the situation. Though some recent changes have been carried into the tax legislation, still there are some inadequacies and shortcomings.

The reform initiatives suffer from inherent lacks as they can not properly address the tax issues of the country. Congress, Citizen Group, media and all concerned should be active for ensuring a better tax mechanism for the betterment of the country. Rossoti’s reforms and subsequent changes can be taken as a guideline in this regards as they (guidelines) manifest leadership, management, organizational structure, and customer’s satisfaction in improving overall aspects of IRS.

Bibliography:

Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916).

Cyr, R. Dennis. and Swanson, Gerald. (2007). Not Quite the Triumph They Describe: A Response to Rainey and Thompson, Public Administration Review. 67 (3), 576–579.

Delmar, Rich. (1998). House Counsel: The Roles of IRS’s Office of Chief Counsel in Tax and Financial Crime Enforcement. USA Bulletin: Tax Prosecutions. Vol. 46, No. 3, p.13.

Faussett, Nancy. (n.d.). Defining Residency for Tax vs. Immigration Purposes. Web.

Final Report of the Select Committee to Study Governmental Operations. (1976). The Internal Revenue Service: An Intelligence Resource and Collector. Web.

FY 2008 EO Implementing Guidelines. Web.

Hollis, Emily. (2004). The Internal Revenue Service: Counting on Learning. Web.

Mikesell , L John. and Birskyte, Liucija. (2007). Another View of IRS Results: A Comment on Rainey and Thompson. Public Administration Review. 67 (3), 574–576.

Paler, Laura. (2007). Exploring the Determinants of Personal Income Taxation: The Experience of Developing Countries. Paper prepared for Political Science Department’s Mini-APSA Conference, Columbia University. Web.

Rainey, G Hal. and Thompson, James. (2006). Leadership and the Transformation of a Major Institution: Charles Rossotti and the Internal Revenue Service. Public Administration Review. 66 (4), 596–604.

Rainey, G Hal. and Thompson, James. (2007). Reply to Mikesell and Birskyte, and to Cyr and Swanson. Public Administration Review. 67 (3), 579–583.

Rolph, R. Earl. (1954). The Theory of Fiscal Economics. London: Cambridge University Press.

Snyder, W. John. The Reorganization of the Bureau of Internal Revenue. Public Administration Review. 1952, p. 221 et seq. Cited inThe Internal Revenue Service: An Intelligence Resource and Collector, Final Report of the Select Committee to Study Governmental Operations. Web.

Transactional Records Access Clearinghouse (TRAC). 2005. Audits of Income Tax Returns Filed by Individuals. Web.

. — — —. 2006. IRS Face-to-Face Audits of Federal Income Tax Returns Filed by Corporations. Web.

U.S. Office of Personnel Management. (2005). U.S. Office of Personnel Management – Ensuring the Federal Government has an effective civilian workforce. Web.

United States v. Drefke, 707 F.2d 978, 981 (8th Cir. 1983).