The authors are former commissioners of the IRS.
The IRS is in crisis.
Geoffrey Chaucer said 632 years ago that curses come back to haunt their originator, just as birds come back to their own nest. He didn’t realize it at the time, but he correctly predicted that years of starving the Internal Revenue Service of funds would create a deep level of dysfunction that is a curse on millions of honest taxpayers.
Taxpayers owed refunds are often not getting them and cannot find out why; taxpayers who filed returns are being sent incorrect notices saying they failed to file; taxpayers who made payments are being told they did not pay and are threatened with collection action; and taxpayers who have questions cannot get answers.
These failures affect people in all walks of life, businesses large and small, non-profits, and tax advisors. A Mom waiting on her refund; a tax expert at the Tax Policy Center whose paper return was lost; organizations that can’t get their Powers of Attorney processed; even former IRS commissioners are not exempt. One of us recently was assessed a penalty for failure to pay a quarterly payment, which was actually paid but not recorded properly by the IRS.
Problems like these do not occur for lack of effort by IRS employees, who comprise a highly, committed work force without nearly the tools and resources to perform their responsibilities. Nor are they only due to the impact of COVID-19. The IRS budget today is only 49% the size it was relative to the economy in 1993. Since then, the number of individual tax returns has increased by 38% and business returns by 84%.
But even those numbers don’t begin to capture the massive increase in IRS responsibilities for administering benefit programs like the Affordable Care Act and provisions included in the 2020 CARES Act and the 2021 American Rescue Plan Act as well as many individual and business tax credits. The Joint Committee on Taxation lists 129 tax credits or other tax breaks for corporations and 179 for individuals. In FY 2021 the IRS sent out more cash in the form of benefits and refunds than the Social Security Administration (SSA), while its total budget was 91% of the SSA budget. But the IRS budget was not only for sending out refunds and benefits. It also administers the entire $4.4 trillion tax system for individuals, businesses, and tax-exempt organizations that file 263 million returns. IRS resources and responsibilities have become structurally unbalanced.
The most immediate crisis is evidenced by a gigantic backlog of unprocessed returns, correspondence, and taxpayer inquiries. The IRS ended 2021 with more than 24 million individual and business returns that are being manually processed while the IRS continued to issue millions of automated notices that required a taxpayer response. But the IRS was often unable to respond to the taxpayer’s answer. The Taxpayer Advocate states: “The IRS last updated its website with information on the status of processing taxpayer responses to notices or letters…a year ago.” If a taxpayer called, only 11% of calls were answered.
Meanwhile, the future burden on honest taxpayers is growing, as the amount of taxes owed but not paid — called the tax gap — has increased to $600 billion a year.
The Biden administration immediately needs to mount a full-on crisis response, which should include temporarily reallocating experienced IRS staff from some enforcement activities and long-term IT projects to clear the backlog of returns, rehiring retired employees to answer phones and correspondence, and more specific communications to taxpayers about when held-up refunds will be cleared. Many automated notices, which only increase the backlog of correspondence, should be suspended until they can be sent out accurately and responded to promptly. The IRS has already initiated some of these changes, but more needs to be done and the changes need to be better communicated.
But only a long-term commitment can rebuild the IRS. And that requires three things from Congress: long-term funding, whether as part of a slimmed down reconciliation bill or as a stand-alone bill; additional authority for managing its workforce; and establishment of clear goals by Congress for providing quality service and reducing the tax gap.
The IRS workforce relative to its workload is completely out of balance. The IRS lost 33,000 (30%) of its skilled workforce from 2010 to 2020. Since then, despite IRS efforts to hire more employees, the workforce has continued to shrink. New employees take years of training and experience to become fully effective. Only a much more flexible and competitive long-term hiring program can compete in the labor market to rebuild an appropriately staffed and skilled IRS workforce.
The IRS must also change the way it provides service and conducts enforcement to make much more use of data and technology. The current level of technology investment is totally inadequate. In the past several years, the IRS budget for technology modernization has averaged about one quarter the amount spent by each of the four largest banks in the U.S. Long-term funding is essential for effective technology investment.
Decades of IRS underfunding are now painfully evident. Taxpayers are suffering and faith in our democracy declines. The Biden Administration and Congress must act now to turn around this disaster that was long in the making and easily predictable.