The IRS Needs Our Love, Not Our Hate!

​The 2021 tax filing season is coming to a close. So, it’s a good time to reflect on the most hated, but perhaps the most necessary federal agency, the Internal Revenue Service (IRS). I am a volunteer income tax preparer for the AARP Foundation Tax-Aide program, and prepare dozens of tax returns each year for seniors and low-income families. I witness first hand the frustrations people have dealing with the IRS, and the complexities and anxieties of complying with the U.S. tax code.

The IRS deserves some of the credit for its negative image. It has been used as a political weapon by unscrupulous lawmakers, and incompetence has prevented it from becoming an efficient, well-run 21st century organization. But Congress deserves much of the credit for the IRS’s failings, through increased mandates and years of underfunding.

​Role of the IRS: The IRS is a bureau of the Department of the Treasury and is responsible for helping taxpayers understand and meet their tax obligations. Congress writes the tax laws, but it is up to the IRS to interpret, enact, and enforce these laws with integrity and fairness. This is not an easy lift, even in the best of times. The pandemic, staff shortages, and years of underfunding have made the work of the IRS even more difficult. 

​What the IRS Gets Right: The IRS is a giant collection agency. It collects over 95% of all revenue coming into the Federal Treasury, nearly $4 trillion per year. In 2020 the IRS spent just 35 cents for each $100 it collected; not a bad return on investment (https://www.irs.gov/about-irs/the-agency-its-mission-and-statutory-authority). 

​The IRS is also very good at sending out tens of millions of refund checks each year. In 2020 and 2021, during the worst pandemic in over one hundred years, the IRS managed to send out hundreds of millions of stimulus payments to most Americans, while still performing its other obligations. But the pandemic placed other strains on the IRS. It was required to send out Advanced Child Tax Credits to millions of families and administer more than a dozen other COVID-relief programs. This has compounded the massive backlog at the IRS.   

​The IRS is Drowning in Paper: According to the National Taxpayer Advocate, Erin Collins, “Paper is the IRS’s Kryptonite, and the IRS is buried in it”. More than 90% of taxpayers file their taxes electronically. This represents a huge success for the IRS, but much more work needs to be done. Last year the IRS received more than 17 million paper returns from individuals, over 4 million amended returns in paper form, and millions more paper returns filed by businesses. Everyone of these paper returns must be keyed into a computer by an IRS employee. According to the National Taxpayer Advocate, last year there were transcription errors on about 22% of these returns.

​The end of the 2021 tax filing season is fast approaching and the IRS is still working on a backlog of nearly 15 million paper returns from 2020. This makes for a lot of unhappy taxpayers who have been waiting for more than a year for their tax refunds. 

​What Congress Needs to Do to Help the IRS:
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1. Provide More Funding: The IRS’s budget is 20% below its 2010 level, resulting in 22% fewer workers than a decade ago ( https://www.cbpp.org/research/federal-tax/congress-needs-to-take-two-steps-to-fund-the-irs-for-the-short-and-long-term). As part of the Build Back Better Act, the Biden Administration wanted to increase funding for the IRS by $80 billion over 10 years. This was a nonstarter for the Republicans, who for years have backed a smaller, less intrusive IRS. In fiscal year 2022 Congress did increase the IRS budget by $675 million to $12.6 billion. This is a step in the right direction, but it is less than half the increase needed for the IRS to get back to 2010 levels.                                                                                                                                                                                                                                                                                                                 Many of the funds that Congress approves are earmarked for specific IRS programs. Congress should give the IRS more flexibility to move funds among its accounts. This would allow for better management of existing programs, as well as the ever-changing demands of Congress.                                                                                                     
2. Tax Law Changes: It seems as if Congress waits until December 31st of each year to finalize changes to tax code legislation. This leaves the IRS scrambling each year to implement changes to the tax code just as they are gearing up for a new tax season. Not only does the IRS have to update its computer programs at the last minute, so do all the makers of commercial tax software. This pushes back the start of the tax filing season and condenses the time available for taxpayers to prepare their returns and for the IRS to process them. This is ridiculous!                                                                                                                                                                                                  Congress should not impose any new tax law changes on the IRS after November 30th if they expect these changes to take effect in the upcoming tax filing season.  In addition to this, any new tax legislation that requires the IRS to hire additional personnel or to purchase new equipment should be funded through the legislation. The IRS has been slowly starving to death, and the results are evident to anyone who has ever tried to get a tax problem solved over the phone or who has filed a paper return.                                                                                                                                       
3. Increase Collections Through Enforcement of Current Laws: Some Congressional Democrats are pushing to impose new taxes on the assets of the wealthiest Americans. For a variety of reasons, I think that this is a bad idea. I will address this issue in a future blog. Enforcement of existing tax laws would not require any new tax legislation and could bring in more revenue to the treasury than a wealth tax could.                                                                                                                                                                                                                                                                                                              The IRS estimates that approximately $400 billion of income taxes goes uncollected each year due to underreporting of income and outright fraud. Some analysts peg the number at closer to $1 trillion a year. Since 2010 the IRS enforcement division has lost 31% of its staff, including 40% of the auditors, due to deep budget cuts. The decline in the numbers of highly qualified revenue agents, able to audit complex returns of high-income individuals and corporations, has been even greater. This has resulted in a 58% decline in the number of overall returns being audited. The decline in audits of the wealthy has declined even more. Some may rejoice at this news, but it only hurts the vast majority of Americans who fairly pay their income taxes. If something isn’t done to close this “tax gap”, social programs will need to be slashed and taxes will need to be raised on those least able to afford it. 

​What the IRS Can Do to Help Itself: 

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1. Focus on Technology: The IRS is working with 1960s technology and processing paper returns by hand. To say that this leads to inefficiencies doesn’t come close to describing the depth of the problem, and it keeps getting worse each year. Over the past two decades many states have begun using scanning technology to automate the processing of paper tax returns. Due to bureaucratic inefficiencies, staffing problems, and funding issues, scanning technology has not been adopted by the IRS. Scanning technology exists which  could help the IRS dig itself out of the mountain of paper (https://www.taxpayeradvocate.irs.gov/news/nta-blog-getting-rid-of-the-kryptonite-the-irs-should-quickly-implement-scanning-technology-to-process-paper-tax-returns/).                                                                                                                                           
2. Focus on Customer Service: According to the National Taxpayer Advocate, just 11% of the 282 million calls to the IRS reached a customer service agent last year. This was due to budget cuts over the last decade which left staffing levels and technology systems woefully inadequate for the task. In addition to hiring and training more customer service representatives, the IRS should implement customer callback technology on all of its telephone lines so taxpayers can elect to receive return calls without waiting on hold. This would go a long way towards rebuilding trust with the American taxpayer.

What Taxpayers Can Do to Help Themselves and the IRS:
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1. Always file your taxes electronically, and have refunds directed to a savings or checking account.                                                                                                                               
2. If you suspect that you are the victim of identity theft, get an IP PIN from the IRS to use when you file your tax return (https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin).                                                                                                                               
3. The IRS contacts taxpayers only through the U.S. mail. Never respond to a solicitation or request from a person claiming to be from the IRS over the phone, text, or email.

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The U.S. Government expects so much from the IRS but doesn’t give it the tools to function as an efficient 21st century organization. The Government heavily leaned on the IRS to implement many of its COVID relief programs while still performing its primary tasks. All this was done as COVID restrictions and funding shortfalls crippled IRS staffing levels. I have only scratched the surface of the challenges facing the IRS. The agency is dealing with millions of cases of tax refund fraud due to ID theft, it generates and responds to millions of pieces of correspondence each year, and participates in many outreach and educational programs.  

No one wants an intrusive, burdensome IRS meddling into their financial lives. But for better or for worse, we need the IRS, and we need it to be run efficiently and administer the tax code fairly. We even need the IRS to step up enforcement, perform many more tax audits, and close the huge “tax gap” that goes uncollected each year. Yes folks, it’s time to show the IRS a little love, and remind our representatives in Congress that we expect them to do the same.

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Thanks,
Armchair American