The Internal Revenue Service has been scaling back its activities and using some of its budgeting flexibility to absorb funding cuts, according to a new government report.

To absorb the budget cuts, the IRS’s Human Capital Office, Office of Chief Counsel, and Small Business/Self-Employed Division each reduced their staff by 16 to 30 percent.

According to officials, they also prioritized legally required programs, such as tax litigation, and reduced some programs or services, such as limiting non-filer investigations, postponing software acquisitions, and delaying approximately 24,000 employee background reinvestigations.

Such scaled back activities potentially reduce program effectiveness or increase risk to the IRS and the federal government, the GAO noted.

The report, from the Government Accountability Office, pointed out that the IRS’s budget shrunk from $12.1 billion in fiscal year 2010 to $11.3 billion in fiscal year 2014, a reduction of approximately 7 percent. The IRS's budget declined by an additional $346 million from fiscal year 2014 to fiscal year 2015.

The IRS used some of its budgeting flexibility to absorb the budget reductions by allocating user fee revenue, which made up 3.4 percent of its budget, or $416 million, in fiscal year 2014. In addition, to increase agency-wide coordination of budget decisions, IRS formed a new office and committee to inform budget formulation and execution decisions.

For fiscal year 2016, the Obama administration has requested $12.9 billion in appropriations for IRS. The request is almost $2 billion (18 percent) more than the IRS's fiscal year 2015 appropriation.

However, last month the House Appropriations Committee adopted a fiscal year 2016 budget proposal that would provide the IRS with a budget of $10.1 billion—$838 million less than the current level and $2.8 billion below the Obama administration’s proposal (see House Committee Approves IRS Budget Cuts). The Senate Appropriations Committee voted last Thursday to reduce IRS funding to $10.5 billion. Meanwhile, a highway-funding bill pending in both the House and Senate calls for new tax enforcement efforts by the IRS to pay for fixing the nation's highways rather than raising gasoline taxes.

Declining Taxpayer Service
Last week, National Taxpayer Advocate Nina Olson released her midyear report to Congress and pointed to dramatic decreases in taxpayer service by the IRS as the agency struggled to absorb the impact of the budget cuts (see Taxpayer Advocate Finds 300,000 Taxpayers Overpaid for Obamacare). The IRS answered only 37 percent of taxpayer calls routed to customer service representatives overall, and the hold time for taxpayers who got through averaged 23 minutes. This level of service represents a sharp drop-off from the 2014 filing season, when the IRS answered 71 percent of its calls and hold times averaged approximately 14 minutes.

The IRS also answered only 45 percent of calls from practitioners who called the IRS on the Practitioner Priority Service line, and hold times averaged 45 minutes. The agency also answered only 39 percent of calls from taxpayers seeking assistance from the Taxpayer Advocate Service on the National Taxpayer Advocate Toll-Free hotline, and hold times averaged 19 minutes.

The IRS answered only 17 percent of calls from taxpayers who called after being notified that their tax returns had been blocked by the Taxpayer Protection Program on suspicion of identity theft, and the hold times averaged about 28 minutes. In three consecutive weeks during the filing season, the IRS answered fewer than 10 percent of these calls.

The number of “courtesy disconnects” received by taxpayers calling the IRS skyrocketed from about 544,000 in 2014 to about 8.8 million this filing season, an increase of more than 1,500 percent. The term “courtesy disconnect” is used when the IRS essentially hangs up on a taxpayer because its switchboard is overloaded and cannot handle additional calls.

 Hillary Clinton wants to raise capital gains taxes to encourage long-term investment, making it more expensive to sell stocks held for less than six years and adding complexity to the U.S. tax system.

Compared with today’s two-tier system—a 43.4 percent top rate for assets held less than a year and 23.8 percent beyond that—the proposal by Clinton, a Democratic presidential candidate, would create a six-rate structure for capital gains for high-income households.

For Americans in the top tax bracket, assets held for less than two years would be taxed at the top ordinary-income tax rate of 43.4 percent, according to the campaign

The rate would drop to 39.8 percent after two years, 35.8 percent after three years, 31.8 percent after four years and 27.8 percent after five years. Taxpayers would have to hold onto assets for at least six years to get the 23.8 percent rate, which would remain the lowest available.

“The current definition of a long-term holding period—just one year—is woefully inadequate,” she said during a speech in New York on Friday. “That may count as long term for my baby granddaughter, but not for the American economy.”

Clinton wants to push capital gains taxes higher than the 28 percent proposed earlier this year by President Barack Obama—and higher than the 20 percent maximum Clinton advocated in her 2008 campaign for president. The former U.S. Senator and Secretary of State attributes her shift to an urgent need to address short-term thinking by investors and corporations.

Wealthiest Households
Clinton’s proposal would raise taxes for the nation’s wealthiest households while encouraging buy-and-hold investing. Her plan would apply only in the top tax bracket—currently taxable income exceeding $413,200 for individuals and $464,850 for married couples.

Those levels are where capital gains are concentrated. The top 1 percent of U.S. households—those with incomes exceeding $641,000—receive 75 percent of the benefits of today’s preferential rates for long-term capital gains and dividends, according to the Tax Policy Center. Almost half of the benefits go to the top 0.1 percent, those with incomes exceeding $3.3 million.