Appropriations for the Treasury Department and Internal Revenue Service in FY2006: Issues for Congress

CRS Report for Congress
Appropriations for the Treasury Department and
Internal Revenue Service in FY2006:
Issues for Congress
Updated January 25, 2006
Gary Guenther
Analyst in Business Taxation and Finance
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

Appropriations for the Treasury Department and
Internal Revenue Service in FY2006: Issues for
Congress
Summary
The Treasury Department performs a host of critical functions as a federal
agency. Foremost among them are protecting the nation’s financial system from a
variety of financial crimes, administering the tax code and collecting tax revenue,
managing and accounting for the public debt, administering the government’s
finances, and regulating and supervising financial institutions.
This report examines the President’s budget request for Treasury and the
Internal Revenue Service (IRS) in FY2006, some of the key policy issues it raised,
and congressional action on the request. It will not be updated again.
For FY2006, the Bush Administration asked Congress to provide $11.648
billion in appropriated funds for Treasury, or 3.8% more than the amount enacted for
FY2005. As usual, the vast share of the proposed budget was to go to the IRS, which
would have received $10.679 billion. The remaining departmental offices and
bureaus would have received the following amounts: departmental offices, $195
million; departmental systems and capital investments, $24 million; Office of
Inspector General, $17 million; Inspector General for Tax Administration, $133
million; Air Transportation Stabilization program, $3 million; Community
Development Financial Institutions Fund, $8 million; Treasury building and annex
repair and restoration, $8 million; Financial Crimes Enforcement Network, $74
million; Financial Management service, $236 million; Alcohol and Tobacco Tax and
Trade Bureau, $91 million; and the Bureau of the Public Debt, $177 million.
The Administration budget request for IRS operations ($10.679 billion) in
FY2006 was 4.3% more than the amount enacted for FY2005. To better align the
request with the IRS’s current five-year strategic plan, the Administration sought to
revise the agency’s budget beginning in FY2006. Under its proposal, the number of
accounts would be reduced from six to three: tax administration and operations
(TAO), business systems modernization (BSM), and administration of the health
insurance tax credit. For FY2006, the Administration asked that $10.460 billion be
spent on TAO, or 4.6% more than was spent for this purpose in FY2005; $199
million on BSM, or 2.3% less than the amount enacted for FY2005; and $20 million
on administration of the health care tax credit, or 41.5% less than the amount enacted
for the current fiscal year. Compared to the amounts enacted for FY2005, the
Administration sought $500 million more for enforcement but $39 million less for
taxpayer service and $4 million less for BSM.
The House and Senate approved somewhat differing versions of an FY2006
appropriations bill (H.R. 3058) that included Treasury and the IRS. As a result, the
differences had to be resolved in a conference committee. Under the conference
agreement passed by the House and Senate on November 18, 2005, and signed by
President Bush on November 30, Treasury is receiving $11.689 billion in funding
(or about $40 million more than the amount requested by the Administration); nearly

91% of that amount, or $10.671 billion, is set aside for the IRS.

Contents
Department of the Treasury..........................................1
Organizational and Functional Profile..............................1
Budget in FY2005 and Proposed Budget in FY2006...................3
Issues for Congress............................................6
Combating Terrorist Financing...............................7
Administration of the Community Development Financial
Institutions Fund......................................8
Funding for the Alcohol and Tobacco Tax and Trade Bureau.......10
Internal Revenue Service...........................................10
Budget in FY2005 and Proposed Budget in FY2006..................11
Issues for Congress...........................................15
Stronger Emphasis on Enforcement...........................15
Use of Private Debt Collection Agencies......................17
Proposed Cuts in Taxpayer Service...........................18
Status and Future of the Business Systems Modernization Program..20
List of Tables
Table 1. Department of Treasury Appropriations, FY2004 to FY2006........5
Table 2. IRS Appropriations, FY2004 to FY2006.......................14

Appropriations for the Treasury Department
and Internal Revenue Service in FY2006:
Issues for Congress
The Treasury Department performs a variety of critical functions as a federal
agency. Foremost among them are protecting the nation’s financial system against
a variety of illegal activities (including channeling or laundering funds to terrorist
groups), collecting tax revenue, managing and accounting for the public debt,
administering the federal government’s finances, regulating and supervising financial
institutions, and producing and distributing coins and currency. Three important
issues facing Congress each year are how much to spend on each of these functions,
what conditions (if any) to impose on how those funds are spent, and what
requirements (if any) to impose on the Treasury bureaus responsible for managing
its critical functions.
This report examines the President’s budget request for the Treasury
Department and its largest operating bureau, the Internal Revenue Service (IRS), in
FY2006, congressional action on the request, and some of the key policy issues it
raised.¹
Department of the Treasury
Organizational and Functional Profile
In recent decades, the Treasury Department has played four specific roles: (1)
formulating, recommending, and implementing economic, financial, tax, and fiscal
policies; (2) serving as the sole financial agent for the federal government; (3)
enforcing federal financial, tax, counterfeiting, customs, tobacco, alcoholic beverage,
and gun laws; and (4) producing postage stamps, currency, and coinage.
The creation of the Department of Homeland Security (DHS) in late 2002 and
its assumption of the authorities and duties transferred to it by executive order in
March 2003 drastically reshaped Treasury’s functional profile.² While Treasury still

¹ For a summary of the Administration’s budget request in tabular form, see CRS Report
RL32905, Transportation, the Treasury, Housing and Urban Development, the Judiciary,
the District of Columbia, the Executive Office of the President, and Independent Agencies:
FY2006 Appropriations, David Randall Peterman coordinator.
² See U.S. President (Bush), “Amendment of Executive Orders, and Other Actions, in
Connection With the Transfer of Certain Functions to the Secretary of homeland Security,”
(continued...)

exerts a strong influence over economic policymaking within the executive branch
and still serves as the government’s financial manager, revenue collector, and
producer of currency and coinage, its role in law enforcement is much more
circumscribed.
At its most basic level of organization, the department is comprised of
departmental offices and operating bureaus. In general, the departmental offices are
responsible for the formulation and implementation of policy initiatives and the
management of departmental operations; the operating bureaus, in contrast, carry out
specific tasks assigned to the department, largely through statutory mandates. The
bureaus typically account for more than 95% of the department’s personnel and
funding.
With one notable exception, the bureaus may be divided into those focused on
financial matters and those engaged in law enforcement. In recent decades, the
following Treasury bureaus have all contributed to the management of federal
finances or the daily operation of the U.S. financial system: Comptroller of the
Currency, U.S. Mint, Bureau of Engraving and Printing, Financial Management
Service, Bureau of Public Debt, Community Development Financial Institutions
Fund (CDFI), and Office of Thrift Supervision. At the same time, law enforcement
has been central to the main responsibilities assigned to the following current or
former Treasury bureaus: Bureau of Alcohol, Tobacco, and Firearms (BATF), U.S.
Secret Service, Federal Law Enforcement Training Center, U.S. Customs Service,
Financial Crimes Enforcement Network (FinCEN), and Treasury Forfeiture Fund.
The exception to this simplified dichotomy is the Internal Revenue Service (IRS),
which is involved in both the collection of tax revenue and the enforcement of federal
tax laws and regulations.
As noted above, the creation of DHS greatly diminished Treasury’s role in law
enforcement. Under the law establishing DHS (P.L. 107-296), the Secret Service,
Customs Service, and Federal Law Enforcement Training Center were transferred
from Treasury to DHS, while the Treasury Forfeiture Fund and many of the law
enforcement duties of BATF were transferred to the Justice Department (DOJ). In
addition, in January 2003, the Treasury Department established a new bureau to
administer laws governing the use of alcohol and tobacco and implement regulations
formerly handled by BATF: the Alcohol and Tobacco Tax and Trade Bureau. Its
main tasks do not involve law enforcement: collecting alcohol and tobacco excise
taxes, classifying those products for tax purposes, and regulating the operations of
industrial users of distilled spirits.
The operations of most Treasury bureaus are funded through annual
appropriations passed by Congress. This is true of the IRS, Financial Management
Service, Bureau of the Public Debt, departmental offices, FinCEN, Alcohol and
Tobacco Tax and Trade Bureau, Office of Inspector General, Treasury Inspector
General for Tax Administration (TIGTA), CDFI, and Treasury’s international
programs. But a handful of bureaus finance their operations largely through the

² (...continued)
Executive Order 13286, Federal Register, vol. 68, Mar. 5, 2003, pp. 10619-10633.

collection of fees for the services and products they provide. This funding
arrangement applies to the Treasury Franchise Fund, U.S. Mint, Bureau of Engraving
and Printing, Office of the Comptroller of the Currency, and the Office of Thrift
Supervision.
Budget in FY2005 and Proposed Budget in FY2006
In FY2005, Treasury received $11.218 billion in appropriated funds, an amount
that was 1.1% more than it received in FY2004 (see Table 1). About 91% of these
funds were used to finance the operations of the IRS, whose budget was set at
$10.236 billion. The remaining $982 million was distributed in the following
manner among Treasury’s other bureaus and its departmental offices: departmental
offices (including TFI), $156 million; OFAC, $22 million; department-wide systems
and capital investments, $32 million; Office of Inspector General, $16 million;
TIGTA, $128 million; Air Transportation Stabilization program, $2 million; CDFI,
$55 million; Treasury building and annex repair and restoration, $12 million;
FinCEN, $72 million; Financial Management Service, $229 million; Alcohol and
Tobacco Tax and Trade Bureau, $82 million; and Bureau of the Public Debt, $174
million. These amounts reflected an 0.83% across-the-board cut (or rescission) in
non-defense discretionary spending that was included in the law funding the Treasury
Department and most other federal agencies in FY2005: the Consolidated
Appropriations Act, 2005 (P.L. 108-447).
For FY2006, the Bush Administration asked Congress to provide $11.649
billion in appropriated funds for Treasury operations — or 3.8% more than the
amount enacted for FY2005 (see Table 1). Once again, the vast share of this
requested amount was to go to the IRS, whose budget would have totaled $10.679
billion. The other departmental offices and bureaus would have received the
following amounts: departmental offices, $195 million; departmental systems and
capital investments, $24 million; Office of Inspector General, $17 million; TIGTA,
$133 million; Air Transportation Stabilization program, $3 million; CDFI, $8
million; Treasury building and annex repair and restoration, $10 million; FinCEN,
$74 million; Financial Management Service, $236 million; Alcohol and Tobacco Tax
and Trade Bureau, $62 million; and Bureau of the Public Debt, $177 million. All
accounts — except those for departmental systems and capital investments and
Treasury building and annex repair and restoration — would have been funded at
higher levels than in FY2005. The Administration also requested that funding for
OFAC be treated not as a separate account but as part of the account for departmental
offices. Under the Administration’s budget proposal, total full-time employment at³
Treasury was projected to rise to 113,242 from 113,002 in FY2005.
Congressional action on the Administration’s budget request for FY2006
commenced in the House with a series of hearings held by the House Appropriations
Subcommittee on Transportation, Treasury, Housing and Urban Development, the
Judiciary, and District of Columbia in March, April, May, and June of this year. On
June 15, the Subcommittee approved by voice vote a measure (H.R. 3058) to provide
funding for Treasury and a handful of other federal agencies in FY2006. The

³ U.S. Treasury Department, Budget in Brief FY 2006 (Washington: Feb. 2005), p. 8.

Appropriations Committee also voted by voice vote to report favorably (H.Rept. 109-
153) to the House an amended version of H.R. 3058 on June 21. Following the
consideration of 48 amendments spread over two days of floor debate, the House
approved the measure on June 30 by a vote of 405 to 18 and sent it on to the Senate.
As passed by the House, H.R. 3058 would have given Treasury $11.529 billion
in funding for FY2006, or $311 million more than the amount enacted for FY2005
but $120 million less than the amount requested by the Bush Administration. The
IRS was to receive $10.556 billion, or $320 million more than its budget in FY2005
but $123 million less than the amount requested by the Administration. The House
denied a request by the Administration to combine funding for taxpayer service, tax
law enforcement, and information systems into a new single account for tax
administration and operations. In addition, H.R. 3058 would have increased funding
in FY2006 relative to FY2005 for the following accounts and in the following
amounts: Alcohol and Tobacco Tax and Trade Bureau, +$9 million; the Financial
Management Service, +$7 million; TIGTA, +$5 million; Bureau of the Public Debt,
+$3 million; FinCEN, +$2 million; and departmental offices (which includes OFAC
and TFI) and Office of Inspector General, +$1 million. Three accounts would have
been funded at lower levels in FY2006 than in FY2005: department-wide systems
and capital investments, -$11 million; Treasury building and annex repair and
restoration, -$2 million; and CDFI, -$0.1 million. One current account would have
received no funding under the measure: the Air Transportation Stabilization
program.
In the Senate, the Appropriations Committee favorably reported (S.Rept. 109-
109) an amended version of H.R. 3058 as passed by the House by a vote of 28 to 0
on July 21. Following three days of debate and the consideration of over 130
amendments, the Senate approved by a vote of 93 to 1 on October 20 a version of
H.R. 3058 that differed in some important ways from the House-passed version.
Under the version of H.R. 3058 approved by Senate, the Treasury Department
would have received $11.698 billion in funding in FY2006 — or $480 million more
than the amount enacted for FY2005, $49 million more than the amount requested
by the Bush Administration, and $169 million more than the amount approved by the
House. The IRS would have received $10.679 billion — or $443 million more than
the amount enacted for FY2005, the same amount requested by the Administration,
and $123 million more than the amount approved by the House. Like the House, the
Committee rejected an Administration proposal to combine funding for taxpayer
service, tax law enforcement, and information systems into a new single account for
tax administration and operations. But unlike the House, the Senate elected to give
the IRS the same amount for tax law enforcement that was requested by the
Administration: $4.726 billion. In addition, the following accounts would have
received an increase in funding relative to their budgets for FY2005: departmental
offices (including OFAC and TFI), +$42 million; Alcohol and Tobacco Tax and
Trade Bureau, +$9 million; the Financial Management Service, +$7 million; TIGTA,
+$5 million; the Bureau of Public Debt, +$3 million; FinCEN, +$2 million; and
Office of Inspector General and Air Transportation Stabilization program, +$1
million. Funding for three Treasury accounts would have been cut relative to the
amounts enacted for FY2005: department-wide systems and capital investments, -$8
million; Treasury building and annex repair and restoration, -$2 million; and CDFI,

$-0.1 million. Furthermore, the Senate-passed version of H.R. 3058 would also have
restored funding for two programs that were effectively eliminated in FY2005:
expanded access to financial services ($4.0 million) and violent crime reduction ($1.2
million).
The significant differences between the versions of H.R. 3058 passed by the
House and Senate meant that a conference committee had to be formed in order to
resolve those differences. In late October, such a committee was formed, and it came
to an agreement on the bill that was detailed in a conference report (H.Rept. 109-307)
released on November 18. Later the same day, the House approved the report by a
vote of 392 to 31, and the Senate did likewise through a procedure known as
unanimous consent. President signed the measure (P.L. 109-115) on November 30.
Under the conference agreement on H.R. 3058, Treasury is receiving $11.689
billion in appropriated funds in FY2006 — or $471 million more than it received in
FY2005. Of this amount, $10.672 billion goes to the IRS — or $436 million more
than it received in FY2005. The conference report specifies that the IRS may
reorganize or reduce its workforce only with the consent of the House and Senate
Appropriations Committees. Moreover, Treasury’s departmental offices are
receiving $197 million, $40 million of which is to be used to combat financial crimes
(including the financing of terrorist operations). The remaining accounts are funded
at the following levels: department-wide systems and capital investments, $24
million; Office of Inspector General, $17 million; TIGTA, $133 million; Air
Transportation Stabilization program, $3 million; Treasury building and annex repair
and restoration, $10 million; FinCEN, $74 million; Financial Management Service,
$236 million; Alcohol and Tobacco Tax and Trade Bureau, $91 million; Bureau of
Public Debt, $177 million; and CDFI, $55 million (to be available until September

30, 2007).

Table 1. Department of Treasury Appropriations, FY2004 to
FY2006
(millions of dollars)
FY2006FY2006
F Y 2004^a F Y 2005^b F Y 2006 Hous e- Senat e - F Y 2006
Account or ProgramEnactedEnactedRequestpassedreportedEnacted
Departmental Offices175156195157198197
Office of Foreign Asset — 22 — — — —
Control
Department-Wide
Systems and Capital363224212424
Investments
Office of Inspector131617171717

General

FY2006FY2006
F Y 2004 F Y 2005 F Y 2006 Hous e- Senat e - F Y 2006
Account or ProgramEnacted^aEnacted^bRequestpassedreportedEnacted
Treasury Inspector
General for Tax127128133133133133
Administration
Air Transportation323 — 33
Stabilization Program
Community
Development Financial61558555555
Institutions Fund
Treasury Building
Annex Repair and251210101010
Restoration
Financial Crimes577274747474
Enforcement Network
Financial Management227229236236236236
Service
Alcohol and Tobacco808262919191
Tax and Trade Bureau
Bureau of the Public173174177177177177
Debt
Internal Revenue Service10,20510,23710,67910,55610,67910,672
Total Appropriations,11,10011,21811,64911,52911,69811,689
Treasury Department
^Source:^Fig^u^r^es^{are f}^r^om^{a bu}^dge^t^a^u^t^h^o^r^ity^{table prov}^{ided by}^th^{e Hou}^s^{e C}^o^m^m^{ittee on}
^A^p^p^r^o^p^r^iatioⁿ^s^w^ith^oⁿ^{e ex}^cep^tioⁿ^.^T^h^e^fⁱ^g^u^r^es^f^o^r^th^{e Sen}^a^{te Co}^m^m^{ittee o}ⁿ^A^p^p^r^o^p^r^iatioⁿ^s^co^m^e
^f^r^om^S^.^R^e^{pt. 109-}^{109. C}^o^lu^mⁿ^s^m^a^yⁿ^o^{t s}^u^m^{to th}^e^total^s^h^owⁿ^{at th}^{e bottom}^becau^s^e^of^rouⁿ^dⁱⁿ^g
^o^r^th^{e ex}^clu^s^ioⁿ^o^f^cer^tain^r^e^lativ^ely^sm^{all lin}^e-^item^s^.
^{a. F}^Y^{2004 f}ⁱ^g^u^r^es^ref^l^ect^an^acros^s^-^t^h^e-^{board res}^cⁱ^s^sⁱ^on^of^0.59%^.
^{b. F}^Y^{2005 f}ⁱ^g^u^r^es^ref^l^ect^an^acros^s^-^t^h^e-^{board res}^cⁱ^s^sⁱ^on^of^0.83%^.
Issues for Congress
According to budget documents, the Administration’s FY2006 budget request
for the Treasury Department was intended to support a variety of strategic objectives.
Heading the list were improving taxpayer compliance with tax laws; modernizing
IRS’s computer and management systems; enhancing Treasury’s capability to analyze
and disrupt terrorist financing and financial crimes; maintaining and safeguarding the
integrity of federal finances and the U.S. financial system; and increasing
opportunities for economic development through policy initiatives such as enacting
permanent tax cuts and fundamental tax reform. This section examines some of the
key policy issues raised by the Administration’s budget request for Treasury

operations except the IRS. Many of these issues are tied to the Department’s
strategic objectives. The policy issues raised by the budget request for the IRS are
examined in a subsequent section.
Combating Terrorist Financing. Not surprisingly, recent congressional
testimony by senior Treasury officials indicates that one of their highest priorities is
uncovering, monitoring, and disrupting or stopping the flow of funds to terrorist
groups.⁴
In the wake of the terrorist attacks of September 11, 2001, Treasury has taken
several noteworthy steps to extend and restructure its involvement in the federal
government’s evolving campaign to uproot the financing of terrorist groups hostile
toward the United States and other financial crimes.
In March 2003, the Treasury Secretary announced the establishment of the
Executive Office of Terrorist Financing and Financial Crimes (EOTF). From the
outset, the Office’s mission was to coordinate and direct Treasury’s efforts to
uncover and dismantle terrorist financing networks, combat a variety of financial
crimes, implement certain key provisions of the Bank Secrecy Act of 1970 (BSA)
and the USA Patriot Act, and represent the United States in international
organizations dedicated to fighting terrorist financing and financial crimes. In
carrying out this task, EOTF was authorized to draw on the resources of FinCEN and
the Office of Foreign Assets Control (OFAC). It appears, however, that these plans
never came to fruition.
About one year later, the Treasury Secretary announced the formation of another
office to oversee and coordinate the department’s contributions to the government’s
campaign against terrorist financing and other financial crimes: the Office of
Terrorism and Financial Intelligence (TFI). TFI seeks to integrate the operations and
resources of the Office of Terrorist Financing and Financial Crime (TF/FC), OFAC,
FinCEN, the Office of Intelligence and Analysis (OIA), and the Treasury Executive
Office for Asset Forfeiture. In essence, TFI has two basic responsibilities: (1)
gathering and evaluating financial intelligence and (2) enforcing various financial
laws and regulations. OIA provides the intelligence, mainly through the analysis of
complex financial transactions. Enforcement is handled by TF/FC, OFAC, and
FinCEN and includes such activities as identifying and freezing the bank accounts
of terrorists, leaders of drug smuggling operations and their support networks;
implementing U.S. sanctions policy; administering and enforcing the BSA; and
fostering close working relationships between domestic law enforcement agencies
and financial institutions around the aim of exposing or tracking illicit activities.
Upon request, TFI also is authorized to assist IRS special agents in their
investigations of allegations of terrorist financing, money laundering, and other
financial crimes.

⁴ See the prepared testimony of Treasury Secretary John W. Snow before the Senate
Appropriations Subcommittee on Transportation, Treasury, the Judiciary, Housing and
Urban Development, and Related Agencies on April 26, 2005. Available at
[ h t t p : / / www.t r e a s .gov/ p r e s s / r e l e a s e s ] .

The Administration’s proposed budget for Treasury in FY2006 seeks to bolster
the agency’s role in the campaign against terrorist financing. It asked Congress to
increase funding for programs within the Treasury Department dedicated to
combating financial crimes (including terrorist financing) from an estimated $25
million in FY2005 to $40 million in FY2006, a rise of 60%. More than half of this
money ($22 million) was to be funneled into OFAC and the remainder to TFI.
Congress evidently agreed with this approach: the enacted version of H.R. 3058
included $40 million for these programs.
The Administration’s request to increase substantially spending on Treasury
programs to combat terrorist financing and other financial crimes raised significant
questions about how these additional funds would be spent, what they would mean for
Treasury’s role in the federal government’s campaign to combat terrorist financing
networks, and whether the likely benefits from the increased spending would outweigh
the cost of expanding the programs. More specifically, would the proposed budget for
countering financial crimes enhance Treasury’s capability to analyze and disrupt
terrorist financing? How would the proposed budget fit into the federal government’s
diversified and evolving campaign against terrorist financing? Would the activities
to be undertaken by TFI in FY2006 duplicate any of the contributions of other
Treasury bureaus (particularly FinCEN) and other federal agencies (particularly the
Department of Justice or the Federal Bureau of Investigation)? If so, to what extent?
What are the expected benefits of expanding Treasury’s programs to counter terrorist
financing and how do they compare to the additional cost of such an expansion?
The Administration provided few details in its budget documents that addressed
any of these questions.⁵
Some Members of Congress had similar questions about Treasury’s plans to
increase its involvement in the campaign against terrorist financing. In its report to
the House on H.R. 3058, the Committee on Appropriations expressed concern about
the purpose of TFI and its role in the government’s campaign against terrorist
financing.⁶ Future congressional oversight of the TFI and related Treasury programs
may wish to focus on these policy questions.
Administration of the Community Development Financial Institutions
Fund. The Administration’s FY2006 budget request for the Treasury Department
included a reduction in funding for the Community Development Financial
Institutions Fund (CDFI) from $55.1 million in FY2005 to $7.9 million in FY2006.
To say the least, the proposal provoked a controversy over its merits.

⁵ For example, in one of the primary documents presenting its budget request for FY2006,
the Treasury Department describes the purpose and organizational structure of TFI but says
little about the justification for the added funding it is requesting. See Treasury Department,
Budget in Brief FY2006 (Washington, 2005), pp. 37-41.
⁶ U.S. Congress, House Committee on Appropriations, Authorizing Appropriations for the
Departments of Transportation, Treasury, and Housing and Urban Development, the
Judiciary, District of Columbia, and Independent Agencies in FY2006, report to accompany^th^st
H.R. 3058, 109 Cong., 1 sess., H.Rept. 109-153 (Washington: GPO, 2005), p. 67.

Since its inception, the CDFI, which was created by the Riegle Community
Development and Regulatory Improvement Act of 1994, has sought to increase the
availability of credit, investment capital, and financial services in relatively poor urban
and rural communities. The fund pursues these objectives by augmenting the private
resources for investment in economic development, affordable housing, and basic
banking services in these communities. It works with two sets of partners in boosting
such investment: private financial institutions certified by the CDFI as community
development financial institutions and private equity groups certified by the CDFI as
community development entities (CDEs).
Under the Administration’s proposal, three core elements of the CDFI — Native
Initiatives, Bank Enterprise Award Program, and Community Development Financial
Institutions Program — would have been consolidated within the Commerce
Department with at least 17 other federal community and economic development
programs.⁷ In taking such a step, the Administration has said it was trying to “achieve
greater results and focus on communities most in need of assistance.” No additional
funding for loans and grants was proposed for the CDFI programs that were to be
transferred to the Commerce Department. It was not clear from the Administration’s
budget documents whether funding for these programs would be cut relative to
spending on them in recent fiscal years. What was clear was that the $7.9 million
requested for CDFI in FY2006 would have enabled the fund to continue administering
the so-called “new markets” tax credit created by the Community Renewal Tax Relief
Act of 2000 and manage its existing portfolio of loans and grants. The credit is
intended to inject greater private investment into poorer neighborhoods with relatively
high rates of poverty and unemployment through the medium of CDEs.
The Administration’s proposal was sharply criticized on the grounds that it
would undermine the prospects for needed economic development in poorer
communities by effectively eliminating the CDFI programs to be transferred to the
Commerce Department. Some feared the proposal would lead to a substantial loss of
seed capital for small banks classified as community development financial
institutions.⁸ Among these critics were some Members of Congress. Their views
apparently proved decisive in the congressional debate over the merits of the proposal:
the enacted version of H.R. 3058 not only retained the current administrative structure
for the CDFI but also provided it with $55.0 million in funding in FY2006 and
FY2007, $6 million of which is for direct loans and $4 million of which is for
technical assistance for native American, Hawaiian, and Alaskan communities.
A policy issue raised by the Administration’s proposal — one that may have
contributed to its defeat — was its impact on the communities that have benefitted
from the CDFI programs the Administration wanted to consolidate within the
Commerce Department. More specifically, the proposal led some to ask whether the

⁷ For more details on the Administration’s proposed consolidation of federal community and
economic development programs, see CRS Report RL32823, An Overview of the
Administration’s Strengthening America’s Communities Initiative, by Eugene Boyd, Pauline
Smale, Tadlock Cowan, Garrine Laney, and Bruce Foote.
⁸ See Hannah Bergman and Laura Thompson Osuri, “Bush Budget Would Spell Pain for
CDFIs,” American Banker, vol. 170, no. 27, Feb. 9, 2005, p. 1.

proposed reorganization of the CDFI would trigger sharp declines in lending to small
firms and investment in commercial real estate development and low-income housing
and gradual retrenchments in the availability of financial services in these
communities. Future congressional oversight of the CDFI may wish to assess the
effects of its programs in the communities directly affected by them.
Funding for the Alcohol and Tobacco Tax and Trade Bureau. The
Administration’s FY2006 budget request also sought to charge user fees for some of
the services provided by the Alcohol and Tobacco Tax and Trade Bureau. Two new
fees were proposed: (1) an administrative fee for “drawbacks” from manufacturers
of non-beverage products and (2) a filing fee for Certificate of Label Approvals for
distilled spirits, wine, and beer, American Viticultural Areas, proposed formulas, and
new permit applications. To make the adoption of the fees feasible, the
Administration said it would seek the enactment of legislation giving the bureau the
authority to collect the proposed fees. The Administration said the fees were
warranted because they would compel the firms benefitting from the bureau’s
regulatory activities to bear at least some of the cost of these activities. Among the
benefits cited by the Administration were the assurance that alcohol and tobacco
products sold domestically were unadulterated and fair competition among firms
subject to the regulations. The Administration estimated that the proposed fees would
raise $28.6 million in revenue in FY2006.
Some opposed the proposed fees on the grounds that they would prove unduly
burdensome for smaller firms, especially family-owned wineries. The opponents
included some lawmakers. Evidently more than a few Members of Congress found
this line of reasoning persuasive: the enacted version of H.R. 3058 rejected the
proposed user fees.
In the minds of some, the Administration’s proposal raised the broader policy
question of under what circumstances is it appropriate for a federal agency to rely on
user fees rather than appropriated funds to cover the cost of providing specific
services.
Internal Revenue Service
In order to finance its operations and many of its programs, the federal
government levies individual and corporate income taxes, social insurance taxes,
excise taxes, estate and gift taxes, customs duties, and miscellaneous taxes and fees.
The federal agency responsible for administering and collecting these taxes and fees
(except customs duties) is the Internal Revenue Service (IRS). In discharging this
responsibility, the IRS receives and processes millions of tax returns and related
documents and payments; disburses refunds; enforces compliance through audits and
other methods; collects delinquent taxes; and provides a variety of services to
taxpayers to help them understand their rights and responsibilities and resolve
problems. In FY2004, the IRS collected $2.035 trillion before refunds, the largest
component of which was individual income tax revenue of $990 billion.

Budget in FY2005 and Proposed Budget in FY2006
In FY2005, the IRS received $10.236 billion in appropriated funds (see Table
2). This amount was 0.5% more than the amount enacted for FY2004. Of the amount
enacted for FY2005, $4.057 billion was designated for processing, assistance, and
management; $4.364 billion for tax law enforcement; $1.578 billion for information
systems management; $203 million for the business systems modernization program
(BSM); and $35 million to administer the health insurance tax credit established by
the Trade Act of 2002. Of the funds appropriated for processing, assistance, and
management, Congress specified that $4 million be used to operate the Tax
Counseling for the Elderly program, and that $7.5 million be used as grants for low-
income taxpayer clinics. None of the funds appropriated for the BSM program could
be spent without the consent of the House and Senate Appropriations Committees.
In addition, the IRS Commissioner was required to submit quarterly reports in
FY2005 to both committees assessing the agency’s “progress, status, and results in⁹
implementing its proposed compliance initiatives” during the fiscal year.
The Bush Administration requested that IRS operations be funded at $10.679
billion in FY2006 — or 4.3% more than the funding the agency received in FY2005
(see Table 2). To bring its proposed budget into closer alignment with IRS’s major
programs and most recent strategic plan, the Administration proposed that the
agency’s budget be restructured beginning in FY2006. Under the proposal, the
number of appropriations accounts in the IRS budget would be reduced from six to
three: tax administration and operations (TAO), BSM, and administration of the
health insurance tax credit. TAO would be equivalent to the existing accounts for tax
law enforcement; processing, assistance, and management; and information systems.
For FY2006, the Administration sought $10.460 billion in appropriated funds for
TAO — or about 5% more than was spent for this purpose in FY2005; $199 million
for BSM — or 2% less than the amount enacted for FY2005; and $20 million for
administration of the health insurance tax credit — or 43% less than the amount
enacted for FY2005. Compared to the FY2005 budget, the Administration sought
$500 million more for enforcement but $38 million less for taxpayer service and $4
million less for BSM. The Administration estimated that its budget proposal would
have boosted total full-time employment at the IRS from 97,440 in FY2005 to 97,679
in FY2006.
In the first few months of 2005, the IRS disclosed how it planned to achieve the
requested $38 million reduction in spending on taxpayer service. Most of the savings,
the agency revealed, would come from the closure of 68 out of 400 Taxpayer
Assistance Centers (TACs) and a reduction in the weekly hours of operation for toll-
free telephone assistance for taxpayers by the end of 2005. These disclosures sparked
howls of protest from some, who feared that the planned cutbacks in service would
make it much harder for many individual and business taxpayers to comply with the
tax laws.

⁹ U.S. Congress, Senate Committee on Appropriations, Transportation, Treasury and
General Government Appropriations Bill, 2005, report to accompany S. 2806, 108^th Cong.,

2d sess., S.Rept. 108-342 (Washington: GPO, 2005), p. 149.

In a bid to ensure that the IRS got the requested funding for tax law enforcement
of $6.893 billion, the Administration proposed that Congress fund IRS operations
through a budgetary mechanism known as a contingency appropriation in FY2006.
Under this method, caps are imposed on discretionary spending for all federal
agencies in accordance with Section 302(a) of the Congressional Budget Act of 1974
and Section 251 of the Balanced Budget and Emergency Deficit Control Act of 1985.
The Administration asked Congress to increase the cap on funding for the IRS in
FY2006 by $446 million. According to existing budgetary rules, Congress could do
so only if it specified that all additional funds be used for enforcement and approved
a base level of funding for enforcement in FY2006 of $6.446 billion. Otherwise, the
added $446 million could not be appropriated or made available to the IRS.¹⁰
A key player in the annual budget cycle for the IRS is the IRS Oversight Board.
Under the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98,
P.L. 105-206), the Board is authorized to review the agency’s annual budget request,
submit its own budget recommendation to the Treasury Department, and determine
whether the budget submitted by the President to Congress is adequate to support the
annual and long-term strategic plans of the IRS.¹¹
The Board recommended a budget of $11.629 billion for the IRS in FY2006, an
amount that was about 14% greater than the agency’s budget in FY2005 and 9%
greater than the budget requested by the Bush Administration for FY2006.¹² While
acknowledging that the IRS had made significant progress in improving customer
service and combating tax evasion in the past few years, the Board argued that more
money should be appropriated than the Administration requested for enforcement (an
additional $35 million), taxpayer service (an additional $111 million), BSM (another
$140 million), and expected increases in IRS operating costs (another $87 million).
Congressional action on the Administration’s FY2006 budget request for the IRS
commenced in the House with a series of hearings held by the House Appropriations
Subcommittee on Transportation, Treasury, Housing and Urban Development, the
Judiciary, and District of Columbia in March, April, May, and June of 2005. On June
15, the Subcommittee approved by voice vote a measure (H.R. 3058) to provide
funding for the Treasury Department (including the IRS) and certain other executive
agencies in FY2006. The Appropriations Committee also voted by voice vote to
report favorably (H.Rept. 109-153) to the House an amended version of H.R. 3058 on
June 21. Following the consideration of a total of 48 amendments spread over two
days of floor debate, the House approved the measure on June 30 by a vote of 405 to

18 and sent it on to the Senate.

¹⁰ See Allen Kenney, “White House Budget Proposes Use-It-of-Lose-It IRS Funding,” Tax
Notes, Feb. 21, 2005, p. 885; and Stephen Joyce, “Administration’s FY2006 Budget
Includes mechanism to Boost Enforcement Funding,” Daily Report for Executives, Bureau
of National Affairs, Feb. 14, 2005, p. G-7.
¹¹ See 26 U.S.C. § 7802(d).
¹² IRS Oversight Board, FY2006 IRS Budget: Special Report (Washington: March 2005),
pp. 9-10. Available at [http://www.irsoversightboard.treas.gov].

As passed by the House, H.R. 3058 would have appropriated $10.556 billion for
IRS operations in FY2006 (see Table 2), an amount that was $319 million more than
the agency’s budget in FY2005 but $123 million less than the amount requested by
the Bush Administration. The House did not endorse the Administration’s proposed
restructuring of the IRS budget. As a result, it was difficult to make meaningful
comparisons between the Administration’s budget request and the funding for IRS
operations included in the House-passed version of H.R. 3058. Nonetheless, it was
possible to compare the funding approved by the House with the amounts enacted for
FY2005. Of the $10.556 billion in funding for the IRS approved by the House, $4.182
billion (or $125 million above the level for FY2005) would have gone to processing,
assistance, and management; $4.580 billion (or $216 million above the level for
FY2005) to tax law enforcement; $1.575 billion (or $3 million below the level for
FY2005) to information systems; $199 million (or $4 million below the level for
FY2005) to the BSM program; and $20 million (or $15 million below the level for
FY2005) to administering the health insurance tax credit. The measure also specified
that of the funds recommended for processing, assistance, and management, $4
million was to be set aside for the Tax Counseling for the Elderly program, $8 million
for grants to low-income taxpayer clinics, and $1.5 million for the IRS Oversight
Board. In addition, the measure included a provision prohibiting the IRS from closing
or consolidating any TACs until TIGTA had completed a “thorough study” that¹³
assessed the “impact of (planned) closures on taxpayer compliance.”
In the Senate, the Appropriations Committee favorably reported (S.Rept. 109-
109) an amended version of H.R. 3058 by a vote of 28 to 0 on July 21. The Senate
approved the bill with a few changes by a vote of 93 to 1 on October 20.
The version of H.R. 3058 passed by the Senate granted the IRS the same level
of funding in FY2006 requested by the Administration: $10.679 billion, or $443
million more than the amount enacted for FY2005 and $123 million more than the
amount approved by the House (see Table 2). Like the House, the Senate rejected the
Administration’s proposed restructuring of the IRS budget on the grounds that it was
“overly simplistic” and hampered the ability of the Appropriation Committee to hold
the IRS accountable for how it used appropriated funds. Under the Senate-passed
version of H.R. 3058, the IRS would have received $4.137 billion for processing,
assistance, and management (or $80 million more than the amount enacted for
FY2005 but $45 million less than the amount approved by the House); $4.726 billion
for tax law enforcement (or $362 million more than the amount enacted for FY2005
and $145 million more than the amount approved by the House); $1.598 billion for
information systems (or $20 million more than the amount enacted for FY2005 and
$23 million more than the amount approved by the House); $199 million for the BSM
program (or $4 million less than the amount enacted for FY2005 but the same amount
requested by the Administration and approved by the House); and $20 million for
administering the health insurance tax credit (or $15 million less than the amount
enacted for FY2005 but the same amount requested by the Administration and

¹³ U.S. Congress, House Committee on Appropriations, Transportation, Treasury, the
Judiciary, Housing and Urban Development, and Related Agencies Appropriations Bill,^th^st

2006, report to accompany H.R. 3058, 109 Cong., 1 sess., H.Rept. 109-153 (Washington:

GPO, 2005), p. 80.

approved by the House). Like the House-passed version of H.R. 3058, the Senate-
passed version also included a provision that would have barred the IRS from using
any of the funds appropriated by the bill to implement any planned reduction in
taxpayer services TIGTA had completed a study “detailing the impact of the IRS’s
plans to reduce services on taxpayer compliance and taxpayer assistance.”¹⁴ The
Senate also agreed with the House in specifying that $4.1 million be set aside for the
Tax Counseling for the Elderly program and $8 million for grants to low-income
taxpayer clinics. But unlike the House-passed bill, the version passed by the Senate
would have removed the cap imposed by the FY1995 Treasury, Postal Service and
General Government Appropriations Act on the amount of user fees collected by the
IRS in a fiscal year that it is allowed to retain and would have prevented the IRS from
competing with the private sector in developing tax return preparation software by
requiring the agency to continue the Free File program begun in 2002.
Table 2. IRS Appropriations, FY2004 to FY2006
(millions of dollars)
^FY²⁰⁰⁶^FY²⁰⁰⁶
^{Account or}^FY²⁰⁰⁴^a^FY²⁰⁰⁵^b^FY²⁰⁰⁶^c^Hou^s^e-^Sena^t^e^-^FY²⁰⁰⁶
^Program^Ena^c^t^e^d^Ena^c^t^e^d^Request^pa^sse^d^pa^sse^d^Ena^c^t^e^d
^P^r^o^c^e^ssing,
^A^s^sⁱ^s^t^an^{ce an}^d4,0094,057 — 4,1824,1374,137
^M^a^na^ge^m^e^nt
^Ta^x^L^a^w4,1714,364 — 4,5804,7264,726
^En^f^o^rcem^en^t
^In^f^o^rm^atⁱ^oⁿ1,5821,578 — 1,5751,5981,599
^Sy^stem^s
^B^u^sine^ss
^Sy^stem^s 388 203 199 199 199 199
^Mo^d^e^rⁿ^izatioⁿ
^Pr^og^r^a^m
^Health
^In^s^u^ran^{ce T}^a^x353520202020
^Cr^e^d^it
^A^d^mⁱⁿⁱ^str^a^tioⁿ
^To^t^a^l,
^Iⁿ^ternal 10,205 10,237 10,679 10,556 10,679 11,672^d
^Rev^e^nue
^Service
^Source:^Fig^u^r^es^{are f}^r^om^{a bu}^dg^{et au}^th^ority^{table prov}^{ided by}^th^{e Hou}^s^e^C^o^m^m^{ittee on}
^A^ppropriation^s^{. C}^o^lu^mⁿ^s^m^a^yⁿ^o^{t s}^u^m^{to th}^{e total}^s^h^owⁿ^a^t^t^h^e^b^o^t^t^o^m^b^ecau^s^e^of^rouⁿ^dⁱⁿ^g^or^th^e
^ex^clu^s^ioⁿ^o^f^r^e^lativ^ely^sm^{all lin}^e-^item^s^.

¹⁴ U.S. Congress, Senate Committee on Appropriations, Transportation, Treasury, the
Judiciary, Housing and Urban Development, and Related Agencies Appropriations Bill,^th^st

2006, report to accompany H.R. 3058, 109 Cong., 1 sess., S.Rept. 109-109 (Washington:

GPO, 2005), p. 134.

^{a. F}^Y^{2004 f}ⁱ^g^u^r^es^ref^l^ect^{a res}^cⁱ^s^sⁱ^on^of^0.59%^.
^{b. F}^Y^{2005 f}ⁱ^g^u^r^es^ref^l^ect^{a res}^cⁱ^s^sⁱ^on^of^0.83%^.
^{c. Un}^der^th^e^Bu^s^h^A^d^mⁱⁿⁱ^s^t^ration^’^s^F^Y^{2006 bu}^dg^{et requ}^es^{t, th}^{ree IR}^S^{appropriation}^s^accouⁿ^t^s^(i.e.,
^proces^sⁱⁿ^g^,^as^sⁱ^s^t^an^{ce an}^{d m}^aⁿ^a^g^e^m^eⁿ^t;^tax^law^en^f^o^rcem^en^{t, an}^{d in}^f^o^rm^ation^s^y^s^t^em^s⁾^w^o^u^l^d
^h^a^v^e^been^con^s^olidatedⁱⁿ^{to a s}ⁱⁿ^g^l^{e accou}ⁿ^t^kⁿ^o^wⁿ^as^tax^admⁱⁿⁱ^s^t^ration^an^d^operation^s^(T^A^O^).
^T^h^{e A}^d^mⁱⁿⁱ^s^t^ration^as^k^e^{d C}^oⁿ^g^r^es^s^to^appropria^{te $10.460 billio}ⁿ^f^o^{r T}^A^{O in}^{FY2006, or abou}^t
^5%^m^o^{re t}^h^an^w^a^s^s^p^en^t^f^o^{r t}^h^at^pu^rpos^{e i}ⁿ^F^Y^2005.
^d^.^Iⁿ^clu^d^{es a r}^e^scissioⁿ^o^f^$⁹^m^illioⁿ^.
The differences between the House-passed and Senate-passed version of H.R.
3058 must be resolved by a conference committee before a version of the bill can be
sent to the President for his signature. Such a committee was formed in late October.
On November 18, it released a conference report (H.Rept. 109-307) spelling out the
terms of the agreement it reached. Later the same day, the House approved the
conference agreement on H.R. 3058 by a vote of 392 to 31, and the Senate did
likewise through a procedure known as unanimous consent. President Bush signed
the measure on November 30.
Under the enacted version of H.R. 3058, the IRS is receiving $10.672 billion in
FY2006, or $435 million more than it received in FY2005. Of this amount, $4.137
billion is being used for processing, assistance, and management; $4.726 billion for
tax law enforcement; $1.599 billion for information systems; $199 million for BSM;
and $20 million for administering the health insurance tax credit. The act specifies
that the IRS may not reorganize or reduce its workforce without the consent of the
House and Senate Appropriations Committees, and that the IRS may not eliminate or
reduce any of the services it provides to taxpayers until TIGTA completes a study of
the likely impact of any such cutbacks on taxpayer compliance. It also directs the IRS
to abide by the terms of the new four-year agreement it signed with the Free File
Alliance, which bars the IRS from competing in the market for tax return preparation
software. Moreover, under the act, the IRS Oversight Board, and the National
Taxpayer Advocate are required to develop a five-year plan for taxpayer services that
balances strategic goals for enforcement and service and submit the report to the
Committees no later than April 14, 2006.
Issues for Congress
The Administration’s budget request for the IRS in FY2006 raised several policy
issues. Each issue was tied in some way to the three principal aims of the agency’s
current five-year strategic plan, which was issued in July 2004: (1) continued
improvement of taxpayer service; (2) strengthened enforcement of the tax laws; and
(3) continued modernization of IRS’s information systems. Taken together, the issues
underscored the difficult tradeoffs facing Congress as it allocated limited resources
among programs intended to advance the three aims at a time when the estimated tax
gap and the federal budget deficit were large and growing.
Stronger Emphasis on Enforcement. The budget request made it clear that
the Administration placed a high priority on improving taxpayer compliance and

collecting overdue taxes.¹⁵ It called for a rise in spending on enforcement of 8%
relative to the amount enacted for FY2005 but decreases in spending of 1.1%for
taxpayer service, 2.1% for the BSM program, and 41.5% for administering the health
insurance tax credit. FY2006 marked the sixth fiscal year in a row that the IRS asked
Congress to fund an increase in enforcement staff. There were no increases in staffing
before FY2005 because the rises in funding for enforcement enacted in FY2001
through FY2004 was used largely to cover unbudgeted increases in operating expenses
or to address other priorities.¹⁶ In testimony before the House Ways and Means
Subcommittee on Oversight, IRS Commissioner Mark Everson stated that if his
agency’s requested budget for enforcement were enacted, the IRS would be able to
increase the audit rate for mid-size corporations from 7.6% in FY2004 to 16% in
FY2008, close 50% more delinquent accounts in FY2008 than in FY2004, and raise
the audit rate for individual taxpayers with taxable incomes between $250,000 and $1
million from 1.5% in FY2004 to 2.8% in FY2008.¹⁷
The Administration sought more resources for tax law enforcement for several
reasons. First, a failure to pay taxes owed was becoming a significant problem.
According to the latest estimate by the IRS, the gross tax gap — which is the
difference between federal taxes owed on legal sources of income and federal taxes
on that income paid on time — in the 2001 tax year amounted to somewhere between
$312 billion and $353 billion.¹⁸ By contrast, the gross tax gap was estimated to have
been about one-third that level in 1992: $110.1 billion to $127.0 billion.¹⁹ Tax
evasion is a serious policy issue because if left unchecked, it can undermine the
fairness and integrity of the tax system, waste considerable economic resources, and
hamper the performance of the economy.
Second, from the mid-1990s through the first few years of the third millennium,
IRS’s resources for enforcing compliance with tax laws and regulations declined while
the volume of tax returns grew. From FY1996 to FY2003, the size of the IRS
workforce engaged in enforcement activities steadily fell from 26,061 in FY1996 to
19,322 in FY2003, a drop of 26%. (The downward trend ended in FY2004 when the
total number of revenue agents, revenue offices, and special agents rose to 20,863.)
Meanwhile, between 1995 and 2003, the number of individual income tax returns

¹⁵ Treasury Department, Budget in Brief FY2006, pp. 11-13.
¹⁶ U.S. Government Accountability Office, Assessment of Fiscal year 2006 Budget Request
and Interim Results of the 2005 Filing Season, report GAO-05-416T (Washington: April 14,

2005), p. 9.

¹⁷ See prepared statement of IRS Commissioner Mark Everson delivered at a hearing of the
House Ways and Means Subcommittee on Oversight held on April 13, 2005. Available at
[ ht t p: / / www.ways andmeans.house.gov/ hear i ngs ] .
¹⁸ See IRS Fact Sheet FS-2005-14, issued on March 29, 2005. The low estimate of the gross
tax gap reflects tax assessments made after taxpayers have appealed rulings by the IRS that
taxpayers actually owe more than they claim on their tax returns. By contrast, the high
estimate is based on the results of audits of tax returns. For more information, see archived
CRS Report 95-41, Tax Gap: Concept and Relationship to Enforcement, by James M.
Bickley. (Available from author.)
¹⁹ Ibid., p. 3.

filed rose from 116.5 million to 130.8 million, a gain of 12%, and the typical return
became more complex owing to new tax provisions and a proliferation of
sophisticated new financial instruments. A predictable result of these trends was a
sharp drop in the share of individual and corporate tax returns subject to examination
over the same period: the overall audit rate for individual taxpayers was 0.65% in
FY2003, down from 1.67% in FY1996; for all corporations with assets of $10 million
or more, the audit rate stood at 12.08% in FY2003, down from 25.33% in from
FY1996.
Third, spending on enforcement has the potential to generate a large return on
investment. Through its enforcement activities, the IRS collects taxes that otherwise
might go unpaid. In addition, the threat of investigation and prosecution inherent in
enforcement activities deters some individuals from engaging in tax evasion, leading
to higher levels of current-year tax payments than otherwise would be the case. In
FY2004, IRS’s enforcement activities yielded $43.1 billion in additional revenue, an
increase of $5.5 billion (or 15%) from FY2003.²⁰ Without providing supporting
evidence, the Administration argued in its budget request for the IRS in FY2006 that
spending $265 million more on enforcement in FY2006 than in FY2005 would yield
nearly $1.2 billion in additional revenue by FY2008. Research on the efficacy of tax
law enforcement activities suggests there is no incontestable causal connection
between spending on enforcement and the amount of revenue collected.²¹ A recent
report by TIGTA questioned the methodology used by the IRS to project a return of
$4.40 in FY2008 for every dollar spent on enforcement in FY2006 above the level of
FY2005.²²
The proposed increase in spending on enforcement raised at least three policy
questions that might be of interest to lawmakers: How much additional revenue
would be collected as a result of the increase, and over what period would it be
collected? Could of its overall budget devoted to enforcement without compromising
taxpayer service or its commitment to protect and uphold taxpayer rights? Should
Congress set enforcement goals for the IRS and make its budget for enforcement
contingent on tangible progress toward achieving those goals?
Use of Private Debt Collection Agencies. As part of its strategy for
improving taxpayer compliance and shrinking the gross tax gap, the Bush
Administration sought in its budget requests for FY2004 and FY2005 the legal
authority to hire private debt collection agencies (PCAs) to help the IRS collect certain
delinquent individual tax debt.²³ The IRS gained the authority with the passage of the

²⁰ See testimony of IRS Commissioner Mark Everson before the House Ways and Means
Subcommittee on Oversight on April 13, 2005, at [http://www.waysandmeans.house.gov/
hearings].
²¹ Martin A. Sullivan, “Rx for the IRS: Spend and Tax,” Tax Notes, Nov. 1, 2004, p. 649.
²² U.S. Treasury Department, Treasury Inspector General for Tax Administration, A Better
Model Is Needed to Project the Return on Additional Investment in Tax Enforcement,
reference no. 2005-10-159 (Washington: September 2005), pp. 4-9.
²³ For more details on the Administration’s proposal, see CRS Report RL33231, The
(continued...)

American Jobs Creation Act of 2004. Under the act, the IRS is authorized to enter
into contracts with PCAs to pursue such debt. Overdue taxes collected through the
firms’ collection activities are to be put into a revolving fund from which the PCAs
will be paid for their services up to 25% of the amount collected. The IRS is soliciting
bids for the first phase of the private debt collection initiative. It intends to award
three contracts in February 2006 and launch a limited collection program involving
the three contractors the following June. All firms approved by the General Services
Administration to undertake debt collection for federal agencies under Federal Supply
Schedule 520-4 are eligible to submit bids. If no problems arise in the first phase of
the initiative, the number of contractors could be expanded to 12 in January 2008.
The proposal to allow the IRS to use PCAs has been controversial since it was
first unveiled. Critics contend that the use of PCAs would violate the well-established
and widely accepted principle that the collection of taxes is an inherently
governmental function, threaten taxpayer privacy, undermine the security of IRS jobs,
and serve as an invitation to taxpayer abuse by giving private debt collectors a
financial incentive to use aggressive tactics with the taxpayers they contact.
Supporters of the proposal retort that these concerns are largely unfounded, and that
the proposed use of PCAs plan offers several advantages over hiring additional IRS
staff to pursue the targeted individual tax debt. First, no appropriated funds would be
used to pay for the services rendered by the PCAs. Second, the private collection
agencies would augment and not replace the IRS’s own collection staff. Finally, the
use of PCAs would enable the IRS to focus its enforcement resources on more legally
challenging cases of tax evasion with potentially higher payoffs.
Some Members of Congress remain opposed to IRS’s private debt collection
initiative even though it is just beginning to take shape. In the House debate over H.R.
3058, Representatives Chris Van Hollen and Rob Simmons introduced an amendment
(H.Amdt. 418) that would have prohibited the IRS from using any appropriated funds
to enter into, implement, or manage contracts with PCAs in FY2006. The amendment
was withdrawn after a congressional supporter of the initiative threatened to raise a
point of order against it. A similar amendment did not surface during the Senate’s
debate over its version of H.R. 3058.
The IRS initiative raised the important question of whether PCAs can collect this
debt more efficiently and effectively than IRS enforcement staff without violating
taxpayer rights. Congress may wish to focus on this question as it oversees the
implementation of the initiative.
Proposed Cuts in Taxpayer Service. Although the Administration said one
of the major aims of its FY2006 budget request for the IRS was to improve taxpayer
service, it called for a net reduction in spending on this service of $38.5 million in
FY2006, or 1.1% below the amount enacted for FY2005. In reality, the
Administration sought a gross cut of $134 million in the budget for taxpayer service,
but it intended to use more than $95 million of that savings to cover expected

²³ (...continued)
Internal Revenue Service’s Use of Private Debt Collection Agencies: Current Status and
Issues for Congress, by Gary Guenther.

increases in the cost of labor, materials, postage, and rent.²⁴ The proposed net
reduction came on top of a drop in spending for this purpose of $104 million in
FY2005 relative to FY2004. Senior IRS officials contended that the proposed cut in
spending on taxpayer service was justified for two reasons. First, usage of IRS
taxpayer assistance centers (TACs), the IRS TeleFile service, and the IRS toll-free
telephone help line had declined in recent years as more and more taxpayers access
the IRS website to obtain needed tax forms and filing instructions and file tax returns
electronically.²⁵ Second, the cost of assisting taxpayers and processing returns was
much lower online than in person or over the telephone.
Some were concerned that further cutbacks in the budget for taxpayer service
would reverse some of the advances in taxpayer service that had occurred since the
passage of RRA98.²⁶ These advances included improved responses by IRS staff to
taxpayer questions over toll-free telephone lines and expanded access to a number of
self-serve options over the telephone and through the IRS website aimed at
simplifying the filing of tax returns and payment of taxes.
Over the first eight months of 2005, senior IRS officials announced or took
several steps intended to cut $134 million from spending on taxpayer service in
FY2006. One such step was a plan announced in May 2005 to close 68 out of 400
taxpayer assistance centers (TACs) nationwide by the end of 2005. IRS
Commissioner Everson estimated that the closures could result in a cost savings of
$50 million to $55 million in FY2006.²⁷ TACs provide taxpayers with a wide variety
of walk-in services, including interpreting tax laws and regulations, preparing
individual tax returns, resolving concerns about taxpayer accounts, and accepting
payments. Two other planned steps were the elimination of electronic tax law
assistance for domestic taxpayers and practitioners and a 20% reduction in the weekly
hours of operation for toll-free telephone assistance; the estimated cost savings from
these steps totaled $18 million in FY2006.²⁸ In August 2005, the IRS ended its
TeleFile service, which made it possible for taxpayers to file tax returns using a
telephone; the measure is expected to save up to $5 million in FY2006.

²⁴ GAO, Assessment of Fiscal Year 2006 Budget Request and Interim Results of the 2005
Filing Season, pp. 7-8.
²⁵ See the written testimony delivered by IRS Commissioner Mark Everson at a joint hearing
held by the House Ways and Means, Appropriations, and Government Reform Committees
and the Senate Finance, Appropriations, and Homeland Security and Governmental Affairs
Committees on May 19, 2005: U.S. Congress, Joint Committee on Taxation, Joint Review^th^st
of the Strategic Plans and Budget of the Internal Revenue Service, 2005, 109 Cong., 1
sess., JCS-6-05 (Washington: GPO, 2005), pp. 8-9.
²⁶ Allen Kenney, “Deja Vu? Bush Wants $500 Million for IRS to Toughen Up in 2006,”
Tax Notes, Feb. 14, 2005, p. 748.
²⁷ Kurt Ritterpusch, “Everson Defends Proposed Services Cuts, Says IRS not Protected from
Fiscal Realities,” Daily Report for Executives, Bureau of National Affairs, April 8, 2005,
p. G-1.
²⁸ Stephen Joyce, “IRS Pushes for $134 Million in Service Cuts; Agency Claims
Alternatives Will Meet Needs,” Daily Report for Executives, Bureau of National Affairs,
Aug. 17, 2005, p. G-4.

The proposed reduction in spending on taxpayer service in general and the
proposed closure of a number of TACs in particular drew sharp criticism from a
variety of players in the annual appropriations cycle for the IRS, including the IRS
Oversight Board, the National Taxpayer Advocate, the National Treasury Employees
Union, and certain Members of Congress. A major concern of critics was how the
loss of 68 TACs and a reduction in toll-free telephone assistance would affect
compliance by those in greatest need of assistance, especially the elderly, low-income
households, and immigrants. This concern so galvanized congressional critics that
they inserted a provision (section 205) in the enacted version of H.R. 3058 that bars
the IRS from using any of the funds appropriated for FY2006 to reduce taxpayer
services until TIGTA completes a study on how the proposed reductions would affect
taxpayer compliance. In addition, the FY2006 defense appropriations bill (H.R. 2863)
passed by Congress in December 2005 contained a provision that prohibits the IRS
from reducing the hours of its toll-free telephone assistance “below the levels in
existence during the month October 2005.”²⁹
Responding to congressional concerns, the IRS announced in late July that it was
suspending the decision to close 68 TACs by the end of 2005 until Congress had
approved a budget for the agency in FY2006.³⁰ In early November, a senior IRS
official disclosed that the agency would not close any TACs before March 1, 2006.³¹In
addition, the IRS is reported to have abandoned its plan to reduce the daily hours of
its toll-free telephone assistance starting on January 23, 2006.³²
The Administration’s proposed reduction in spending on taxpayer service in
FY2006 raised the issue of how the reduction would affect taxpayer compliance over
time. Some lawmakers were concerned that the planned cuts in taxpayer service
would lead to more individuals failing to fulfill their legal obligations under the tax
code even if more money were spent on enforcement. Although senior IRS officials
argued that compliance could only improve by shifting funds from taxpayer service
to enforcement, they provided no hard evidence to support this claim during
congressional action on the Administration’s budget request for the IRS. One
question lawmakers may wish to address as they oversee IRS operations and its use
of appropriated funds concerns what the proper balance between tax law enforcement
and taxpayer service might be.
Status and Future of the Business Systems Modernization Program.
The Administration’s budget request for the IRS in FY2006 also was intended to
support the strategic goal of “modernizing the IRS through its people, processes, and
technology.” Critical to this effort, in the view of many, is the BSM program, which

²⁹ Diane Freda, “Service Backs Off Plan to Reduce Hours of Phone Help Line in Face of
Legislation,” Daily Report for Executives, Bureau of National Affairs, Jan. 24, 2006, p. G-4.
³⁰ Stephen Joyce, “IRS Postpones Decision to Close TACs Until 2006 Budget Process
Completed,” Daily Report for Executives, Bureau of National Affairs, Aug. 1, 2005, p. G-

11.

³¹ Stephen Joyce, “No IRS Taxpayer Assistance Centers Will Close Before March, Magrante
Says,” Daily Report for Executives, Bureau of National Affairs, Nov. 3, 2005, p. G-3.
³² Freda, Daily Report for Executives, p. G-4.

seeks to upgrade IRS’s antiquated collection of computer systems through targeted
investments in new information systems designed to handle with greater efficiency
such crucial functions as financial management, the processing of tax returns, and the
release of refunds. Congress first created an appropriations account for BSM in
FY1998, and the program began the following year. Initially, it was envisioned as a
15-year venture whose total cost would not exceed $8 billion. Through FY2006, a
total of $2.1 billion has been appropriated for BSM. No appropriated funds may be
spent until the House and Senate Appropriations Committees have approved an annual
BSM expenditure plan submitted by the IRS. The annual appropriation for BSM has
been declining since it peaked at $405.6 million in FY2002: the amount enacted for
FY2006, $199 million, is 2% below the amount enacted for FY2005 ($203 million),
which was 47.5% below the level of funding authorized for FY2004.
The decline in funding for the program in recent fiscal years reflects considerable
doubt in Congress that IRS management is capable of taking the steps needed to
improve the program’s performance and rein in its cost. From the start, the BSM
program has been plagued by cost overruns and schedule delays for key projects. This
doubt and related concerns influenced congressional consideration of the
Administration’s FY2006 budget request for the program.³³
Nonetheless, the BSM program is beginning to yield technological advances that
could yield significant benefits for taxpayers and the IRS. The advances should
eventually enable taxpayers to file and retrieve increasing volumes of information
electronically and the IRS to reduce its backlog of collections cases and gain
immediate access to financial information needed to enforce compliance with tax laws
and regulations. Since 2004, the IRS has deployed the following information systems
developed through the BSM: (1) the Modernized E-File, which is intended to allow
large and small firms and tax-exempt organizations to file their tax returns
electronically; (2) E-Services, which allows most taxpayers and tax practitioners to
conduct business with the IRS electronically; (3) the Customer Account Data Engine,
which will gradually replace the agency’s outmoded computerized database of
taxpayer information and is currently used to process 1040EZ returns for single
taxpayers with refunds; and (4) the Integrated Financial System, which replaces key
aspects of IRS’s core financial systems and functions as its new internal accounting
system.³⁴
Proposals to lower funding for the BSM program raise some interesting policy
issues. Some analysts are concerned that continued reductions in the budget for BSM
are bound to lessen IRS’s chances of achieving its primary goals for the program and
cause avoidable delays in implementing certain planned technology improvements.³⁵
In addition, further reductions may adversely affect taxpayer service and IRS
enforcement activities in the long run. Raymond Wagner, the Chair of the IRS

³³ Senate Committee on Appropriations, Transportation, Treasury, the Judiciary, Housing
and Urban Development, and Related Agencies Appropriations Bill, 2006, pp. 138-139.
³⁴ GAO, Assessment of Fiscal year 2006 Budget Request and Interim Results of the 2005
Filing Season, p. 17.
³⁵ Allen Kenney, “Budget Issues Hamstring Modernization, IRS Officials Say,” Tax Notes,
Nov. 22, 2004, pp. 1084-1085.

Oversight Board, stated in congressional testimony that the BSM program is the “key
to improving customer service and enforcement,” and that the program should be
expanded “not only to reduce costs and speed up delivery time, but to avoid a
catastrophic collapse of the IRS’s archaic legacy computer systems.³⁶

³⁶ See prepared testimony of Chairman Wagner at a hearing held by the House Ways and
Means Subcommittee on Oversight on April 13, 2005. Available at
[ ht t p: / / www.ways andmeans.house.gov/ hear i ngs ] .