The Effect of Recent Internal Revenue Service Missteps on Taxpayer Perceptions

By Davies, Thomas L.; Lavin, Angeline M. et al. | Journal of Business and Accounting, October 1, 2015 | Go to article overview

The Effect of Recent Internal Revenue Service Missteps on Taxpayer Perceptions


Davies, Thomas L., Lavin, Angeline M., Moen, David H., Journal of Business and Accounting


INTRODUCTION

The origin of the Internal Revenue Service can be traced back 150 years to the Civil War when President Abraham Lincoln and Congress established the Bureau of Internal Revenue (Bureau) in conjunction with the enactment of the first income tax in 1862. Once the need for revenue to fund the war dissipated, this first tax was repealed. An attempt to resume the tax in 1894 failed when the United States Supreme Court held that the tax was unconstitutional in 1895. Ratification of the Sixteenth Amendment to the Constitution in 1913 provided Congress with the authority to enact an income tax without the need for it to be apportioned among the states based on population. In 1953, the Bureau was reorganized and renamed the Internal Revenue Service (hereinafter referred to as the 1RS). In 1998, the 1RS again underwent a comprehensive reorganization and modernization pursuant to the 1RS Restructuring and Reform Act of 1998 (1RS (b), 2014).

Most individuals are well aware of the role of the 1RS; it is the agency that collects revenue for the federal government and administers the federal tax laws. According to the United States Department of the Treasury, the 1RS processed more than 239 million tax returns and collected $2,524 trillion in taxes (gross receipts) in fiscal year (FY) 2012, which represented 92% of the federal government's receipts for the annual period (U.S. Department of the Treasury, FY 2014). Despite these efforts, federal outlays for the year were in excess of $3.5 trillion, resulting in an annual deficit of a trillion dollars. However, all taxes owed are not always paid. It has been reported that in 2006 (the most recent information made available), the estimated net tax gap was $385 billion. The net tax gap is defined as the amount of tax owed by taxpayers that is "not paid on time and is not collected subsequently, either voluntarily or as the result of enforcement activities." For purposes of comparison, the 1RS also recently revised its estimate of the 2006 gross tax gap to be $450 billion. This larger "gross" gap is defined as the amount of true tax liability not paid in time by taxpayers. The difference between the gross and net gaps, or $65 billion for 2006, is the portion of the differential which is expected to eventually be collected through late tax payments and 1RS enforcement efforts. Related to this, the 1RS estimated that the voluntary compliance rate in 2006 was 83.1% (1RS (a), 2012). More recently, the National Taxpayer Advocate (NTA) reported in her 2013 Annual Report to Congress (submitted in December 2013), that approximately "98% of the revenue collected by the 1RS each year is paid timely and voluntarily. Only two percent comes from 1RS enforcement actions" (Taxpayer Advocate Service, 2013).

Taxes are on the minds of many US citizens at the beginning of the year as they prepare to file and pay their prior years' taxes. The goals of this research are to study whether taxpayer perceptions of the 1RS are impacted by one's perception of the seriousness and consequences of the 1RS missteps as well as on the individual's overall opinion of the agency.

LITERATURE REVIEW

In order to fulfill its duties as tax collector/rule enforcer, the 1RS expends considerable effort both in terms of finances and personnel. Similar to other discretionary programs, the 1RS receives its funding through annual appropriations by Congress (Marr and Friedman, 2014). Measured in 2014 dollars, the agency's funding for FY 2010 was $13.2 billion, while for FY 2014, funding had fallen by seven percent to $11.3 billion. The biggest decline in funding took place in FY 2013 (roughly $900 million to $11.4 billion) as part of the sequestration process implemented by the federal government. For FY 2015, President Obama's budget included a proposed increase in the agency's budget of $1.2 billion for a total of $ 12.5 billion, restoring it to roughly its 2010 funding level in non-inflation adjusted terms (Marr and Friedman, 2014). …

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