So far, tax season is proving to be anything but ordinary. Tax filings are down, and refunds are off to a sluggish beginning. And it’s not only taxpayers getting a late start: the National Taxpayer Advocate (NTA) just released its annual report to Congress a short while ago. By statute, the report should have been submitted by December 31, 2018. This year, however, the lapse in Internal Revenue Service (IRS) funding during the shutdown meant that no Taxpayer Advocate Service (TAS) employees were available to finalize the report. The result was that the report was submitted in mid-February – and it pulled no punches, cataloging real challenges facing the IRS and taxpayers this season.
The Executive Summary for the report weighs in at 96 pages, and the first volume of the report is nearly 700 pages long (it’s taken me until now to review it). If you expected the five-week shutdown – the longest in U.S. history – not to affect the tone of the report, you’d be mistaken. Nina Olson, the National Taxpayer Advocate (NTA), writes in her Executive Summary that “[t]he five weeks could not have come at a worse time for the IRS.” The shutdown hit at the same time as taxpayers were grappling with a new tax law and a “completely restructured” tax form. As a result, the IRS kicked off the current filing season “inundated with correspondence, phone calls, and inventories of unresolved prior year audits and identity theft cases.”
(You can read more about the new tax form here.)
So what’s standing in IRS’ way? According to Olson, the agency’s most important issue is addressing the antiquated technology systems.
Last year, the IRS experienced computer system issues on Tax Day, April 17, 2018. As a result, the IRS was forced to extend the filing season, giving taxpayers an additional day to file and pay their taxes. But more important, Olson says that the crash “prompted talk of the risk of a catastrophic systems collapse” and she says that risk does exist. She warns, however, that there is a greater risk. “IRS performance already is significantly limited by its aging systems,” she writes, “and if those systems aren’t replaced, the gap between what the IRS should be able to do and what the IRS is actually able to do will continue to increase in ways that don’t garner headlines but increasingly harm taxpayers and impair revenue collection.”
(You can read more about the Tax Day 2018 crash here.)
Revenue collection is what most taxpayers think of when they think of the IRS. In fiscal year (FY) 2018, the IRS collected nearly $3.5 trillion with a budget of $11.43 billion (that’s a return of about 300:1). Even with those kinds of numbers, funding for IRS technology upgrades—provided through the Business Systems Modernization (BSM) account—remains limited. According to Olson, BSM funding was reduced by 62% from the previous year and constituted just 1% of the IRS’s overall appropriation.
That’s why the TAS’ top legislative recommendation is for Congress to provide the IRS with additional dedicated, multi-year funding to replace its core IT systems. And to stem worries about waste or ill-advised spending, the TAS suggests that an independent third party evaluated an IT spending plan each year.
Without additional funding, Olson warns that the outlook is not good. The IRS is, she writes, already “stretched to its breaking point.”
That was before the shutdown.
As I reported earlier, the shutdown exacerbated an already hectic tax season. According to Olson, on January 24, 2019, the IRS had:
- over five million pieces of mail that had not been batched for processing;
- 80,000 responses to FY 2018 Earned Income Tax Credit audits that had not been addressed; and
- 87,000 amended returns waiting to be processed.
By the end of the first week after the shutdown ended, things were improving. However, there was one significant exception: the level of service or the Balance Due/Installment Agreement line was only at 6.7%. This means that 93.3% of the taxpayers calling to make payment arrangements – again, for the week after the shutdown ended – were unable to speak to a live person for help. These numbers, writes Olson, “translate into real harm to real taxpayers.”
In addition to collecting revenue, the IRS is also tasked with paying out certain federal benefits and payments. Notably, the Earned Income Tax Credit (EITC) is a refundable tax credit that Olson characterizes as “among the largest federal antipoverty programs” paying out $63 billion for about 25 million taxpayers in 2018. Other credits, like the Premium Tax Credits (PTC) help taxpayers by offsetting the cost of health insurance. “It is,” notes Olson, “irresponsible for an agency that touches all aspects of people’s lives to be underfunded, understaffed, and at the mercy of shutdowns.”
The NTA has several suggestions for how to fix these ongoing problems. Increased funding, as noted earlier, is clearly a priority. But Olson also calls for fundamental changes in the way that IRS functions during a shutdown – especially as it relates to enforcement actions and collections – to protect taxpayers and improvements in communications with taxpayers. Olson also recommends that Congress should require the IRS to seriously study and report on the possibility of expanding its withholding system to move closer to a hybrid pay-as-you-earn (PAYE) system; withholding was a significant thorn in the side for taxpayers this year (you can read more about withholding following tax reform here).
Olson emphasizes that we “need to honor our taxpayers by providing them the best tax administration possible.” The report went on to detail the TAS recommendations to improve the effectiveness and efficiency of the IRS.
The report was dedicated to “the employees of the Internal Revenue Service and the Taxpayer Advocate Service, who, despite experiencing economic hardship and anxiety during the recent government shutdown, returned to work with energy and dedication” as well as to Olson’s staff “who worked night and day to get this report out in record time on their return from the shutdown.”
You can find the full report here.