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This report arrives at the close of a very difficult year for the IRS. It found itself mired in a scandal relating to tax-exempt organizations, resulting in the resignation or retirement of the acting Commissioner and other members of the IRS senior leadership. It went through seven difficult months – from May to December – during which, under the leadership of a very able senior civil servant, it attempted to right both its operations and its reputation. During this time, it experienced a 16-day shutdown that has delayed the start of the 2014 filing season and exposed thousands of taxpayers to harm from enforcement actions initiated just before or during the shutdown.  In the midst of all this, it is a credit to the talent and professionalism of IRS employees that they managed to conduct the business of the agency as well as they have.

I submit that all of these short-term crises mask the major problem facing the IRS today – unstable and chronic underfunding that puts at risk the IRS’s ability to meet its current responsibilities, much less articulate and achieve the necessary transformation to an effective, modern tax agency.

Throughout the Most Serious Problems section of this report, we recount the ways in which chronic underfunding drives the agency to develop short-term solutions that merely patch over problems and impose unnecessary burden and even harm on taxpayers. These short-term solutions also create more work for the IRS in the end, thereby wasting precious resources. As the IRS spends its resources to address problems in this ad hoc manner – to put fires out – it is unable to direct attention and talent to the long-term challenges it faces as it attempts to modernize. Simply put, without a stable funding stream and adequate resources to invest in the future, the IRS will fall short of fulfilling its mission to serve the U.S. taxpayer and collect revenue.