Overtaxed Agency

Weekly WastebasketOvertaxed AgencyThe IRS is stretched thin and under delivering

Budget & Tax,  | Weekly Wastebasket
Mar 26, 2021  | 6 min read | Print Article

As trillion-dollar spending bills and new federal programs pop up like spring flowers, there are some cracks in the infrastructure that make these investments possible. A recent hearing with the Commissioner of the Internal Revenue Service and a report from the Inspector General make it clear the IRS is stretched thin. Love ‘em or hate ‘em, the IRS is crucial to making government work. Whether you want to rein in deficits, seek equity in public policy, or just want to know how to fill out your form 1040, you should be concerned.

Everyone is familiar with taxes, but not everyone is familiar with the Tax Code. At a couple thousand pages (tens of thousands with the case law and guidance) it’s daunting, even for us. But in those pages lie hundreds of exclusions, deductions, preferential rates, and credits. Depreciation for business investments, tax credits for maintaining railroad tracks, student loan interest deduction, the child tax credit – you name it, you can probably find it. And policymakers have created these to promote certain behaviors or achieve particular goals or reward parochial interests. They’re often viewed more favorably than spending (allowing people or businesses to “keep their money” instead of getting paid for doing something). But they reduce revenue to the tune of $1.4 trillion a year and add to the deficit. That’s basically as much as the entire annual discretionary budget that funds government every year.

The Tax Code is also an important part of the federal response to COVID-19. The IRS is the agency processing individual stimulus checks. The CARES Act last March tasked them with making dozens of changes. A full two months into the 2020 filing season, the recently enacted American Rescue Plan Act changes the rules again. The law mandates the IRS increase and turns the child tax credit into a monthly payment while making a number of retroactive changes aimed at helping individuals and providing stimulus.

But the IRS is broken. Last Christmas it had a backlog of 12 million unprocessed paper returns. It’s grown to 24 million. Less than one quarter of calls to the help hotline are answered. Error resolution that used to take 3 to 5 business days is taking 10 to 14. The commissioner just testified the Child Tax credit change won’t happen by the July 1 deadline. It might happen by the end of the year. Personnel that should be working on it are instead focused on the rebates and retroactive changes.

This isn’t just a stimulus issue. Office closures due to COVID-19 are partly to blame, you can’t process a paper file if you can’t access the paper file. But the IRS ailments were a pre-existing condition.

Over the last ten years the IRS has shrunk. It has 30,00 fewer employees. The agency’s budget is 20 percent smaller. It routinely makes an appearance on GAO’s high risk list. And since at least the George W. Bush Administration, when Treasury Secretary Paul O’Neill requested “$400 million in investments to modernize the IRS’ outdated computer system” it’s been playing catch-up with the modern IT world. You know who has modernized their systems and approaches? Hackers and state-backed cyberattacks. In 2019, then-IRS Commissioner Rettig estimated that 45 percent of the IRS workforce would be retirement eligible in two years (that would be now) and that less than 3 percent of the workforce was 30 years old or younger.

Yet from Obamacare, to the 2017 tax cut, to COVID-19 recovery, it has more mandates.

There are real consequences. The tax gap, the gulf between what is owed and what is collected has grown from $381 billion a year (2011-2013) to $570 billion in 2019 and an estimated $7.5 trillion over the next decade. It also can’t catch the cheats. An Inspector General report found that from 2014-2016, the IRS did not even look into 369,180 cases where high income tax filers (making over $100,000) didn’t even bother to file a tax return ($20.8 billion owed). This Includes a subset of nearly 2,000 returns each owing at least $1 million for a total of $13.5 billion. And the ancient IT system and lack of personnel means the IRS can’t provide timely assistance, whether to address COVID or answer questions.

It’s past time to bring the IRS into the 21st century. COVID-19 required an enormous fiscal response. And there are a lot of big spending plans on the horizon. But lobbyists and lawmakers have made the code overly complicated. Congress should provide the IRS the tools it needs to make filing simpler for individuals and to catch the scofflaws and cheats that undermine federal investments. We have plenty of other places more worthy of cuts.

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