The head of tax at a major US technology company has suggested that the US Internal Revenue Service (IRS)’s funding cuts are a mixed blessing from a corporate taxpayer’s perspective.
“I’ve found the reduction in funding helpful in one respect and harmful in another,” they told International Tax Review. “It’s been helpful because, with their limited resources, the IRS is now forced to pick their battles, as opposed to having a shotgun approach. The bad part of this is that the audits tend to take longer, because there aren’t enough agents.”
On balance, however, the tax head said that the constraint on IRS resources had been generally helpful from an audit perspective for their company. The IRS, the head of tax said, is “forced to either march through audits quickly and efficiently or actually pass on certain tax cheaters”.
This is because the IRS now has fewer staff than at any time since 1953, a recent report by ProPublica found.
Tax researchers who spoke to ITR said that the agency’s falling funding was reducing its ability to fulfil the central tasks of any tax administration, including providing clarity and guidance for corporate taxpayers.
“The charter of the IRS is not simply to catch tax cheats; it is to enforce and administer the tax law. This includes helping taxpayers comply with their obligations,” said Ruth Mason, professor of law at the University of Virginia. “IRS and Treasury are working hard to provide that guidance, but slashing budgets does not help.”
However, there is now increasing pressure on corporate tax departments to take advantage of the situation, especially given the changes wrought by the US Tax Cuts and Jobs Act – an area in which taxpayers are still awaiting clarity on the rules and further guidance.
Steve Rosenthal, senior fellow at the Tax Policy Center, said that a lax and underfunded tax authority can end up making life harder for in-house practitioners, who face pressure to implement aggressive tax planning in order to reduce their effective tax rates.
“When the tax law is vague and the guidance is short, that gives a lot more latitude for aggressive interpretations. It’s a race to the bottom,” Rosenthal said. “There’s immense pressure on corporate tax directors to go along with the race. How do they explain to their executives and their board why their effective tax rate is so much higher than their competitors’?”
The UK experience
The problem is not isolated to the US or the TCJA. In the UK, the EMEA tax heads of two major multinational groups disagreed sharply about how a decade of cuts to HMRC’s funding had affected their tax practices.
The first EMEA tax director said their frustrations stem from not being unable to get answers to simple questions about the tax rules.
“It always takes too long, and in many cases we need to keep asking the question repeatedly, because it’s just difficult to get a straight answer,” they said.
“In our case – being a large company – the system is that we have a customer compliance manager [CCM] whom we can contact through a general mailbox,” the tax director continued. However, while their query is then ‘in theory’ passed on to the appropriate official, they complained that it often never seemed to get that far, forcing them to ask again.
Tax heads are fond of bemoaning HMRC’s perceived lack of capacity, but the taxpayer experience of the agency appears to depend on the staff members that they have a contact with, another tax head suggested to ITR.
“Our customer compliance manager is very good,” they said, citing the informality with which it was possible to discuss tax matters with the contact. “You can talk to them on a proactive basis – you don’t have to wait until there’s an inquiry. You can have prospective discussions, or practical, commercial discussions, which I don’t think you can have with other tax authorities.”
The same tax heads acknowledged that many of their peers had not had such a positive experience of working with HMRC in recent years. “I have heard from other people that [getting answers from
Tax officers are equally frustrated. Speaking to ITR, Anneliese Dodds, Labour shadow treasury secretary, cited a House of Commons briefing that found that half of HMRC staff felt that the government’s reorganisation plans would undermine their ability to clamp down on tax evasion and avoidance, and that 73% felt the plans would undermine their ability to provide services to taxpayers.
“I have to say that that was my assessment, as well, when I visited a number of current and former HMRC offices right across the country,” Dodds told ITR.
The agency has lost half its staff since 2005. This is despite each member of HMRC’s compliance staff bringing in an average of more than £900,000 a year in reclaimed tax, according to analysis by the Public and Commercial Services Union.
A spokesperson for the UK Treasury told ITR: “Since 2010 we’ve provided HMRC with £2 billion [$2.6 billion] of additional investment, ensuring HMRC has the resources it needs to tackle avoidance, evasion, and non-compliance.”
The IRS, meanwhile, did not respond to a request for comment.
It is tempting, in the age of multilateral tax reform, to let international initiatives like BEPS and fast-moving tax legislation overshadow the importance of government agencies for taxpayers. But there appears to be no substitute for agile, responsive and adequately funded tax authorities.
