The IRS’s Increasing Reliance on “User Fees” Decreases Services & Options for Taxpayers

Due to the Tea Party targeting scandal (which is still being resolved) and other grievances, Congress has been unwilling to fully-fund the Internal Revenue Service’s (IRS) budget request for enforcement of compliance with tax laws. As NTUF warned last year, the agency has been looking for ways to supplement its budget through its discretionary authority to increase user fees or establish new fees for certain services. At the time of our report, the user fees under consideration were kept secret: The IRS’s Taxpayer Advocate Service was required to redact the specifics of the fee hike proposals in its report to Congress. One such substantial increase that could diminish options for taxpayers seeking assistance has now been finalized while a new user fee on tax preparers that was established last year was recently struck down by the courts.

The IRS intends to increase the Enrolled Agent Special Enrollment Examination (EA-SEE) fee eight-fold from $11 to $81 as of March 1, 2018, with another jump to $103.97 in May of 2019. Currently anyone who passes the EA-SEE exam can be a certified taxpayer representative before the IRS, but due to the impending user fee increases coming, it could become too costly for individuals to obtain. The program enables more options for taxpayers who need help: Enrolled agents assist with tax preparation, audits, collections, and appeals on behalf of corporations, small businesses, or private individuals. Additionally, these agents can represent taxpayers anywhere, and, to maintain certification, they must adhere to ethical standards and complete continuing education courses.

In a recent announcement, the IRS explained that they priced the fees to cover the administrative costs of the program. Robert Kerr of the National Association of Enrolled Agents counters, “The IRS has repeatedly stated that the tax administration system benefits from more enrolled agents, so why on earth are they making it harder to become one?” Signalling that there will indeed be fewer enrolled agents, the IRS projects that receipts from the fee will shrink from $9 million (in 2017) to $8 million after the hike takes effect in 2018. (However, there is no corresponding line-item showing the costs to run the program in the Budget Appendix nor in the IRS’s budget justification submitted to Congress.) If the intent of the steep fee hike is to have fewer new enrolled agents to help with tax preparation or to resolve taxpayers’ problems with the IRS, this would run counter to the agency’s mission to provide “top quality service” to taxpayers, and make compliance with our overly-complex tax code even more difficult.

There have been cases where the courts struck down IRS attempts to boost its budget through user fees. In 2010, the IRS imposed a new $50 user fee to obtain or renew preparer tax identification numbers (PTIN) that preparers are required to use on federal tax returns or refund claims. Earlier this year, a federal district court ruled that the IRS lacks the legal authority do so and ordered the IRS to refund the $300 million in fees that have been collected. (The IRS is currently seeking an injunction to continue assessing the fee pending appeal.) This is part of the ongoing effort by the IRS to increase its oversight of tax preparers. A 2011 licensing system was also struck down by the courts, but proposed legislation in Congress would grant additional authority to the IRS that could end up forcing many independent tax preparers out of business due to increased compliance costs. The result would mean less competition and fewer choices for filers.

The IRS has also increased user fees on installment agreements, a service that allows taxpayers who fail to pay their taxes on time to make affordable monthly payments to eliminate their tax debt. The IRS raised the fee to enter into such agreements from $120 to $225, nearly doubling it. Although installment agreements are designed to boost compliance, the higher user fees could discourage taxpayers from using the service which would result in greater numbers of uncollectible accounts.

The Taxpayer Advocate has raised concerns that the IRS is implementing or considering new and higher user fees without taking into account the burden imposed on taxpayers and on voluntary compliance. It is a no-brainer that as costs rise, compliance decreases, which leads to uncollectable accounts. Providing more options and better taxpayer services up front will reduce the need for heavy-handed enforcement later.

Of course, Congress could resolve a lot of the compliance concerns by enacting comprehensive reform that simplifies the tax code, secures taxpayer rights, and reduces the costs of administering our tax system.