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Taxes: IRS crisis 'has just been building up over years,' former IRS commissioner says

Former IRS Commissioner Charles O. Rossotti joins Yahoo Finance Live to discuss the backlogged process of receiving tax refunds and the outlook on IRS profitability and efficiency.

Video Transcript

KARINA MITCHELL: We're going to pivot now. It is tax season and tax time. And if you think you've got problems trying to get your documents ordered and filed, our next guest says the IRS is dealing with much larger long-term problems that could impact filers. Here to help us discuss, let's bring in Charles Rossotti, former IRS commissioner. Charles, thanks so much for being with us today. Now you say the IRS--

CHARLES O. ROSSOTTI: Sure, thanks for having me.

KARINA MITCHELL: Thank you. You say the IRS is in crisis mode. Why do you say that? And how does it impact taxpayers?

CHARLES O. ROSSOTTI: Well, I think that millions of people probably could find that out just from their own dealings with the IRS. I mean, many people are being impacted right now, is just not being able to get a refund. Over 70% of the people do get refunds. Many businesses get refunds. And I'm sure that many of the people listening right now have been frustrated in not getting what they expected and not being able to find out why.

In addition, millions of other people are probably getting or have gotten some sort of written notice or letter from the IRS, saying that there was some sort of error or maybe that they owe money, and maybe they didn't owe money. To be honest, I actually got one of those myself. Of course, it was wrong. I paid, but they had an error in the way they processed things.

And this is all being experienced right now, but it is something that has just been building up over years. The IRS has been cut year after year after year in terms of their staff, in terms of their investment for technology, really, for almost 25 years, at the same time that the Congress has piled on more responsibilities.

And, you know, I know many of your listeners are in business. It's sort of like a business that every year, they said, well, we can get by a little bit less fewer people. We can defer, you know, what we do for our computer upgrades. And, you know, nothing really that bad will happen. And you just do that for 25 years.

At the same time, you get more and more, in the case of businesses, customers, but in the case of the IRS, tax returns, eventually, it's going to fall apart. And actually, that is really what is happening right now.

KARINA MITCHELL: Mm-hmm, and Charles, just to help put it into perspective the IRS budget is about 49% of what it was two decades ago. So how much do you think that contributes to long-term problems that the IRS is facing?

CHARLES O. ROSSOTTI: That is huge. I mean, it's not just that it's half in relation to the GDP, but think about it, everything has gotten bigger and more complicated. There's 84% more business returns. But on top of that, the IRS is not only a tax collection agency. Of course, that's what everybody thinks of. It's a huge payment industry. Last agency-- I mean, last year, the IRS actually sent out more money in the form of refunds and benefits than the Social Security Administration. I mean, think of that.

And its budget was less than that of Social Security. That's before you get to collecting any taxes. So this has gotten completely out of balance over a very long period of time. And eventually, you get what you have now, and taxpayers are feeling it. And that's, by the way, before you even get to the fact that they're supposed to actually collect taxes that people owe and don't pay, which is another huge amount, $600 billion a year. So we have a crisis. It's not only a short-term crisis. It's a long-term problem. And it's going to take some big changes to fix it.

KARINA MITCHELL: So already such a backlog from last year that the IRS is still working through. How much more challenging is this tax season going to be, though, with all these extra stimulus payments, child tax care payments, and then also now cryptocurrency needing to be-- gains and losses needing to be reported? How does that all make this more challenging?

CHARLES O. ROSSOTTI: Well, you just said it yourself. I mean, these things add to-- one thing adds to another. I mean, certainly some of it was due to the pandemic and the additional things that were done. But here's the thing that you might be surprised. There are actually 129 individual and 179 business tax breaks or credits in the tax code. Each one of those is something that has to be evaluated and usually results in the IRS paying out money. That's before you ever get to collecting anything.

So these things all add up to a huge overcapacity for the IRS. They ended up with 24 million paper returns not processed at the end of the year. Those are still building up as the tax filings go. And then, until recently, they were continuing to send out lots-- and millions and millions of notices to people, saying that they had an error in their return or they hadn't paid, even where that was really not accurate, because it was caused by the backlog.

So we have a mess. I mean, it's just got to be dealt with in the short-term. But in the long-term, it really takes three things to fix this. One is it has to get some funding restored on a long-term basis. It can't be done in three months or six months. Think about it. You can't hire people and train them in the tax code if you only have three months or six months left in the fiscal year.

And the technology is essential. Every business that's in almost any sphere is investing in technology in order to make themselves more efficient. The IRS is grossly deficient in how much funding it's had for technology. So it needs long-term funding, but it also needs the flexibility to hire people. And it needs to have Congress set some clear standards and goals for what it's expected to do.

KARINA MITCHELL: All right, thank you so much. Many challenges ahead and tax filers wanting the best advice on how to move forward quickly and painlessly this season. We'll have to leave it there. Thank you so much for your time today, Charles Rossotti, former IRS commissioner. Have a great weekend.