No matter your politics, I think we can all agree that the IRS is underfunded, understaffed, and has ridiculously outdated technology that prevents it from doing even its most basic functions competently or effectively. While I am happy that the Inflation Reduction Act will include significant funding for the IRS, I remain frustrated by the hyper focus on enforcement activities. More than half of the $80 billion in new funding would go to those activities rather than to technology enhancements, customer service or processing of returns, payments, and other documents.
Let’s review where we are today with the IRS. The Taxpayer Advocate’s 2022 report to Congress was scathing. Key findings were:
- At the conclusion of the 2021 filing season, the IRS faced a backlog of over 35 million individual and business income tax returns that require manual processing for a variety of reasons. Some had been filed on paper, were failed automated checks, or were amended returns. The bad news is that all these returns now require human intervention, which means processing will be further delayed—burdening average taxpayers who are left waiting for their money.
- During the filing season, the IRS received 167 million telephone calls—more than four times as many calls as the 2019 filing season. At the height of the season, calls were clocked in at a staggering 1,500 per second.
- The poorly staffed agency could not come close to handling the volume, reporting a level of service on its accounts management telephone lines of 15%, with only 7% of taxpayer calls reaching an actual customer service representative.
- On the 1040 line, the most frequently called IRS toll-free number, only 3% of callers ever reached a live person.
As president and CEO of the Massachusetts Society of CPAs, representing 11,000 CPAs and professionals in accounting, I can verify that these numbers translated to an avalanche of incorrect notices, bills, threats to taxpayers, and countless hours wasted trying to correct them—as well as hours spent on hold only to be dropped by the now infamous courtesy disconnect, when the IRS decided you had been on hold long enough. These are not the so-called ultra-rich tax avoiders that this proposal aims to target, but average taxpayers and small businesses whose refunds are unnecessarily delayed. This has led to ballooning costs of compliance and an almost complete erosion of confidence in our system.
I know all too well about the impact this has on average taxpayers and our economy. I started my career at the Massachusetts Department of Revenue as chief of enforcement for the Child Support Enforcement Division. Getting payments on overdue child support was, in many cases, critical to the health and well-being of the children who depended on that support. One of the most efficient ways to do that was through automated enforcement—and the sanctions were tough—on everything from bank levies to tax return intercepts to driver’s license suspensions.
The key to these enforcement measures was absolute confidence in the data in our systems. Otherwise, like what is happening today at the IRS, staff would spend more time resolving bad enforcement actions than they saved through automating the processes. From the department’s perspective, that was productivity loss. But for the custodial and non-custodial parents, the disruption to their lives and to the ongoing support of their children were potentially devastating. Later as deputy commissioner, and then commissioner, at the DOR, I had to manage the same balance. Clean data was not only critical to effectively using notices and automated data, but it also drove all enforcement activities.
Before coming back to the DOR as commissioner, I was a consultant for state and local government and had the opportunity to consult with the Australian Tax Office for three years. Their goal was to make paying taxes in Australia cheaper, easier, and more personalized. The idea was that the cost of compliance was as real a cost as the payment of taxes, and it was incumbent on the government to keep those costs reasonable. It was incumbent on the tax department to give great service and make voluntary compliance simple. Like in the US, Australia has a voluntary tax system, and voluntary compliance is what pays the bills.
Funding at the IRS has been cut drastically in past years. According to the Congressional Budget Office, in fiscal year 2021, the IRS’s budget was $11.9 billion—over $200 million less than 11 years ago, which represents a 22% reduction in real terms. Since 70% of the agency’s budget goes to people, that has resulted in draconian cuts in personnel with no offsetting advances in technology. Most of the technology in use by the IRS today is antiquated, with major systems dating back to the 1960s.
Part of the strategy for managing staff shortages from a revenue perspective was to use data to send automated notices—almost 220 million per year—to taxpayers. These notices are frightening, disruptive, and often wrong. Since returns and payments are not processed, and calls from practitioners go unanswered, it follows that the data is not sufficiently reliable to use for automated enforcement.
The US tax system depends on trust that it will be administered fairly and competently and that our data will be treated properly. Recent reports that the IRS shredded 30 million unprocessed documents were just the latest shocking development. The worst part? It wasn’t surprising. The IRS’ recent performance has betrayed that trust in a catastrophic way, threatening the underpinnings of a voluntary system.
Over 98% of the $4 trillion that the IRS collects annually comes in through voluntary compliance, meaning ordinary taxpayers and their representatives filing the required forms, making the required payments, and waiting patiently for their refunds. What fuels those activities are simple processes and easy, accessible customer services and technologies that work. There is more threat to revenue from botching those baseline activities than from curtailing more active enforcement activities.
There is no question that firm and fair enforcement is part of what we expect from the IRS. But until they are appropriately funded to process returns, protect data, and answer the phone, they cannot effectively enforce the tax law, and we should not be investing one cent in additional enforcement activities.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Amy Pitter is president and CEO of the Massachusetts Society of CPAs and former commissioner of the Massachusetts Department of Revenue.
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