By William R. Stromsem, CPA, J.D., Assistant Professor, George Washington University School of Business
The IRS budget has been reduced over the last 10 years while legislation and circumstances, including the pandemic, have added greatly to its workload. The IRS seems stretched and this may result in a rough tax season ahead. It is still backlogged from last year and is about to start this year’s filing season while it is likely to be tasked with a third round of COVID-19 relief and stimulus payments.
This article makes the case for increased funding for the IRS for the upcoming filing season and the future and also provides a link to tell practitioners the timing and what to do for various backlogged interactions with the IRS from last year. The IRS is critical to implementing various aspects of relief and stimulus programs, is critical to raising much needed revenue, and is probably the closest link most individual citizens have with the government – a smooth operation is important to restoring faith in government service during this difficult time.
IRS Needs More Funds to Address 2021 Tax Season Issues and to Deliver COVID Relief and Stimulus Payments
Because additional coronavirus relief legislation was enacted at the end of the year, the IRS has had to reprogram computers and modify tax forms, causing a delayed start to the tax filing season. The IRS normally allows tax returns to be filed late in January each year, but for the current filing season, the IRS announced that it cannot receive returns until Feb. 12 (returns can be prepared earlier but cannot be received until then). This delayed start will be particularly harmful to low-income families who rely on refunds from the Earned Income Tax Credit and Additional Child Tax Credit that will not be received until early March.
Commissioner Charles Rettig stated: “Planning for the nation's filing season process is a massive undertaking, and IRS teams have been working nonstop to prepare for this as well as delivering economic impact payments in record time. Given the pandemic, this is one of the nation's most important filing seasons ever. This start date will ensure that people get their needed tax refunds quickly while also making sure they receive any remaining stimulus payments they are eligible for as quickly as possible."
The IRS has processed two stimulus payments, sending out approximately 300 million checks or direct deposits to provide relief for families and a stimulus to the economy. It will likely be tasked with delivering a third round of stimulus payments in the coming months. Just as the filing season is starting, the IRS will require substantial resources to reprogram computers, handle taxpayer inquiries and correct errors that are inevitable in sending out so many payments. Taxpayers do not need glitches in our tax system as they cope with other issues related to the pandemic. The IRS needs additional funding immediately to make the upcoming tax season go smoothly.
IRS Needs More Funds to Address Its Work Backlog from Last Year
While the new tax season is here, the IRS is still working on issues backlogged from the last tax season. Because of the pandemic, the IRS had to delay the tax filing due dates in 2020. IRS offices were closed for much of the year, mail processing was delayed for many months and much important work had to be placed on hold. Many IRS employees are still not in offices and although the IRS has now opened its mail and processed payments, many substantive taxpayer issues from the 2019 filing season have not been addressed. Incorrect notices were sent to many taxpayers because the taxpayer’s mail responses were not properly received and processed by the IRS due to pandemic closures, including:
- If a taxpayer e-filed a return and sent a check in the mail, the check may not have been received until much later, causing the IRS to issue erroneous notices to collect taxes, interest and penalties. Although the IRS has ceased sending some notices, many substantive issues remain.
- Some taxpayers received notices of default on installment agreements for checks that were mailed but not timely received because of mail delays, and this has resulted in some notices cancelling the installment agreements and proposing charges to reinstate the agreement.
- Many returns cannot be filed electronically and the paper returns have not been processed with refunds delayed.
- Taxpayers who have not received refunds from last year’s returns often cannot reach an IRS assistor to explain the problem and have generally been told not to file again or call to ask about their refunds.
- Offers-in-compromise are not being entered by the IRS because agents do not have time to process them.
- In addition to erroneous notices that were sent, in many instances the IRS has not sent notices to properly inform the taxpayer of the error.
The IRS has listed specific transactions that are currently delayed and provided information on how long they are delayed and what taxpayers or their representatives should do.
IRS Needs More Funds to Improve Taxpayer Service
Although the lack of adequate taxpayer communications was exasperated by the COVID pandemic, this was also a significant problem in prior years. The IRS serves taxpayers as they comply with the tax law, but without adequate resources the IRS is unable to effectively serve this function. The IRS has tried to address taxpayer-service problems, but the problems are continuing and may become worse with the added issues of this tax season relating to stimulus payments, delayed credits and refunds, catching up its workload, etc.
The National Taxpayer Advocate indicated in her 2021 Purple Book that the IRS received over 100 million telephone calls in fiscal 2020, but was only able to answer 24%. With 150 million stimulus checks going out, even if there is just a 2% error rate from things like changed addresses or bank accounts, that means 3 million unhappy citizens calling the IRS with questions that will require research and response. Often, taxpayers who call the IRS to try to comply with our complex tax law spend hours on hold and sometimes end up with a “courtesy disconnect.” Taxpayers are told that lines are busy and to call back later. This undermines taxpayer faith in the tax system and reduces the level of taxpayer compliance.
IRS Needs More Funds to Interact with Tax Professionals
In our complex tax system, many taxpayers engage professionals to assist with compliance issues and, like taxpayers, preparers have serious problems engaging with the IRS on substantive issues. Although practitioners have a “hotline,” due to underfunding it is understaffed. Practitioners should not have to spend hours of scarce professional time on the telephone or trying to reach understaffed departments. Clients and professionals who bear the cost of this inefficiency are badly served by our tax system, and the IRS needs immediate funding to be able to work more efficiently and effectively with taxpayer professional representatives.
IRS Needs More Funds for Its Increasing Workload
In the past 10 years, funding of the IRS has been reduced by $11.5 billion or a reduction of 20% after adjusting for inflation. In this same period, more returns are being filed, resulting in additional work being placed on the IRS with no additional resources, such as:
- Reprogramming of computers and developing new or changed tax forms for law changes;
- Issuing stimulus checks or making direct deposits to taxpayer bank accounts—timely payments are essential to help citizens and to achieve the intended stimulus to the economy;
- Implementing COVID relief measures such as deductions of expenses covered by the Payroll Protection Program (PPP) and forgiveness of indebtedness income for PPP loans; and
- Preventing or dealing with the national problem of identity theft, particularly attempts to steal taxpayer refunds—the IRS must quickly verify the identity of taxpayers to avoid delaying these refunds. This function requires additional human capital.
Some of the current issues relate to the IRS’ inability to update its information systems because of lack of funding. The Taxpayer First Act of 2019 identifies improvements to be made, but these are to be phased in through 2025.
IRS Needs More Funds to Collect Unpaid Taxes
The IRS is incredibly efficient in collecting revenue, having collected $3.5 trillion in fiscal year 2020 when the government had a budget of $11.5 billion, a revenue/expense ratio of 300:1. Revenue collection is particularly important in a time of record debt and deficits to fund government relief and other programs, to stimulate the economy and to keep government borrowing as low as possible. Our self-assessment system of taxation relies on voluntary compliance by taxpayers, but this has to be backed up by a credible audit potential. In recent years, the audit rate has declined to around .5% of tax returns filed and for 2019 returns, this rate of audit has likely declined even more. Having a chance of being audited every 200 years on average does not provide much of a credible audit potential.
The most recent report of the tax gap (the amount of taxes that should have been paid but were not) was published in 2019, and for tax years 2011-2013 they averaged a net (after later collections) of $381 billion dollars or about 14% of total tax liability. This level of noncompliance is unacceptable when revenue is so badly needed. If the IRS is unable to collect taxes fairly due, compliant taxpayers may have to pay more than they should fairly have to pay. This may lead to disrespect for the tax system, growing noncompliance and lack of faith in our government.
IRS Immediate Needs
The IRS needs funds for:
- the current tax season and COVID-19 relief implementation,
- catching up on last season’s backlog,
- service to taxpayers,
- efficiently working with tax professionals,
- properly collecting taxes owed, and
- other new unfunded missions.
The IRS is one of the most important points of contact between the federal government and its citizens. Effective, efficient and fair administration are critical to maintaining faith in government during a time of crisis.