IRS to taxpayers: Do you trust me?

• Author: Wiley, Melissa L.

One of the greatest risks to the U.S. tax system today is the erosion of trust in the fairness and effectiveness of the system. As the IRS budget continues to fall in inflation-adjusted dollars and the demands on the agency increase, the IRS is increasingly being asked to do more with less (see National Taxpayer Advocate, Annual Report to Congress, 2020, p. vi, available at tinyurl. com/3t6sd55n: "Since FY 2010, Congress has reduced the IRS's budget by about 20 percent after adjusting for inflation."). Years of hiring freezes have allowed skilled employees to retire from the agency without the benefit of being able to pass along their knowledge to new, younger hires (id.). The media consistently reports on falling audit rates, decreasing levels of customer service, and the ability of the wealthy to avoid paying their fair share. In a system based largely on self-reporting, particularly with the "gig economy" on the rise, the threat of taxpayers choosing to simply play the audit lottery is not just theoretical.

The question of whether and how much to increase the IRS budget could not be more important at this juncture. The United States literally cannot afford a decrease in tax compliance rates. Taxes are not a mere inconvenience; they are, to quote Supreme Court Justice Oliver Wendell Holmes, the price "we pay for civilized society" {Compania Generalde Tabacos de Filipinos, 275 U.S. 87,100 (1927) (Holmes, J., dissenting)). The IRS collects 96% of that price, according to recent estimates (Publication 5382, IRS Progress Update, Fiscal Year 2020: Putting Taxpayers First, p. 2, available at tinyurl.com/c7kn9fej).

And yet the core theory of tax administration could not be simpler: Taxpayers who believe that the system is fair, efficient, and effective and who believe that they are being treated fairly and well comply at significantly higher rates than those who do not (see San Juan, "Who Pays the Price of Civilization?" 9 Columbia Journal of Tax Law 45 (January 2018); Hartner, Rechberger, Kirchler, and Schabmann, "Procedural Fairness and Tax Compliance," 38 Economic Analysis and Policy 137 (2008)). And taxpayers make these assessments with respect to a variety of touchpoints by them and their businesses with the IRS:

* Do I believe the tax rates that apply to me are fair, both in the abstract and as compared to other taxpayers?

* Do I believe I am being treated fairly by the IRS in connection with an examination or other enforcement activity?

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