By Daniel J. Pilla
Wednesday, November 06, 2019
Anyone who deals with the IRS on a regular basis knows
that the agency is in trouble: IRS employees are less able than ever to
effectively and efficiently handle their work. The internal problems facing the
agency were greatly exacerbated by the 35-day government shutdown that began in
late December of last year. But the shutdown is not by any means solely
responsible for the agency’s dire situation.
To put all this in better perspective, let me give you
pictures of what the agency looked like before the shutdown, and what it has
looked like after the shutdown.
What the IRS Faced
before the Five-Week Shutdown
According to the National Taxpayer Advocate’s 2018 annual
report, the shutdown
Could not have come at a worse time
for the IRS — facing its first filing season implementing a massive new tax
law, with a completely restructured tax form. As I outline below, the IRS is
entering the filing season inundated with correspondence, phone calls, and
inventories of unresolved prior year audits and identity theft cases.
Let’s drill into these challenges in more detail.
Implementing the “postcard” tax return. The Tax
Cuts and Jobs Act (TCJA) contained more than 80 changes to the tax code, many
of them substantial. Among the most challenging was the law’s mandate to create
a “postcard-sized” tax return, which necessitated the redesign of the three
major personal-income-tax returns, Forms 1040, 1040A, and 1040EZ.
Along with creating a new tax return, the IRS had to
design and create six new schedules to go with the new return. The reason is
that the law’s mandate that the 1040 form be “postcard-sized” didn’t take into
consideration all the supporting information that has to go with a tax return,
such as Schedule A for itemized deductions, Schedule C for self-employed
persons, etc. Those forms were not eliminated. So the redesign of Form 1040
actually created more steps in the return-preparation process than
existed under the old design.
Nevertheless, the IRS had to churn out the new forms in
time to get the design specs and coding to private tax-prep-software companies,
and to reprogram its own computers to process the new forms, all well before
the start of the 2018 filing season, which began on February 1, 2019.
Handling cases in the fraud-detection program. In
2018, the IRS’s fraud-detection system was overloaded with a record inventory
of cases. This is the system of filters used when processing tax returns to
determine whether there is apparent identity fraud in connection with a return.
When a return is flagged, the system freezes the claimed tax refund until the
legitimacy of the return is verified.
Unfortunately, the NTA’s annual report found that 81
percent of the returns flagged as potentially fraudulent by the system were in
fact legitimate, and that high rate of “false positives” overloaded IRS
processing staff. To make matters worse, the part of the process that was
supposed to recycle flagged returns back through the system as new wage data
came in from employers and the Social Security Administration completely
failed. This failure required “the IRS to manually upload wage data and manually
process frozen returns through the system. It was not until late July 2018
that the IRS had waded through all the frozen refund returns and determined
which were legitimate and which were not,” according to the NTA report.
This left tens of thousands of angry citizens with
legitimate returns falsely flagged by the system clamming for their refunds. As
the NTA explains it:
Not surprisingly, taxpayers did not
take this lying down. TAS cases involving this issue increased by 287 percent
from January 2018 through September 2018, and for the first time ever, the NTA
Case Intake line experienced two-hour wait times, as taxpayers called desperate
to figure out when their refunds would be released.
On top of that, returns flagged as potentially fraudulent
that claimed the Earned Income Tax Credit (EITC) were sent to be audited for
verification of EITC eligibility. Historically, the EITC has been a huge source
of fraud and errors. The IRS looks at EITC claims carefully because the credit
is “refundable.” That is, qualifying citizens actually get more money back from
the IRS than they paid in. Each year, approximately 26 million people get cash
benefits worth about $64 billion through the EITC. The IRS estimates that more
than $18 billion of that total is improperly paid out, and that about half of
EITC claims each year have errors.
The IRS division tasked with auditing the flagged EITC
claims was ill-equipped to handle the massive influx of cases it received in
2018. In the first place, it was still overloaded with all of the unresolved
EITC cases from the 2017 filing season. In the second place, the IRS has lost
about 28 percent of its tax-examiner staff since 2010. A huge backlog of cases
combined with a shrinking staff makes for a serious problem.
Adapting to the newly passed TCJA. The TCJA is
widely referred to as the most sweeping tax reform in 20 years. The law’s
80-plus changes to the tax code necessitated the rewriting of, or creation of,
multiple tax forms, instructions, publications, regulations, and notices. IRS
employees across all functions were shifted to the Forms and Publications
Office to help manage that load. In addition, IRS attorneys were pulled away
from their regular cases to write massive, complicated new regulations
interpreting the law.
Coping with aging case-management systems. At the
core of the problem is the fact that the IRS, perhaps more so than any other
government agency, is entirely dependent on its computers, due to the sheer
number of people it touches and the volume of data it handles.
For the past 30 years or so, the IRS has been trying to
replace its key legacy systems, known as the Individual Master File (IMF) and
Business Master File (BMF) systems. These programs store business and
individual account information on a year-by-year basis. They are reportedly the
oldest centralized databases in the entire federal government.
In addition, the IRS has been working to integrate 60
separate case-management systems. At present, there is no single IRS computer
system to allow employees to see at a glance where in the system a case is at
any given time and who is responsible for it. While the IMF system indicates,
for example, that a particular taxpayer owes a specific amount for a certain
year, and that the IRS is actively seeking to collect that amount, other
systems must be accessed to determine the status of the collection case and
which IRS employee is responsible for it. This seems bizarre, given that the
agency has spent many billions of dollars over the past 30 years specifically
to upgrade its computer systems.
Unfortunately, those many billions of dollars in upgrades
didn’t prevent the IRS’s computers from crashing on Tax Day 2018. The one-day
system failure required the agency to announce a one-day filing extension for
taxpayers. According to the NTA, the “crash prompted talk of the risk of a
catastrophic systems collapse, and that risk does, indeed, exist.”
What is responsible for this? While it’s true that the
IRS has spent billions on computer upgrades over three decades, it’s also true
that modernization efforts have been mostly ad hoc. They have started and
stopped, in part due to funding fluctuations, in part because engineering and
programming personnel are routinely pulled from IT projects to deal with the
constant barrage of legislative changes pumped out by Congress every year, and
in part because the IRS is unable to paint a clear picture to Congress of the
tech advances made in exchange for the money spent.
The conclusion the NTA draws from all these problems is
not at all surprising: “The IRS is stretched to its breaking point.”
What the IRS Faced
after the Shutdown Ended
The IRS, already overwhelmed before the government
shutdown, faced an even more intense caseload after the shutdown ended.
Consider the following:
·
After the shutdown, there were 5 million pieces
of mail that were not sorted or processed in any way, and thus not forwarded to
the their intended recipient within the IRS for action.
·
Some 80,000 citizens under EITC audit responded
to IRS requests for information to verify their entitlement to the credit. None
of the 80,000 responses was addressed by the IRS, and none of the 80,000 people
in question received their refunds in a timely manner.
·
The IRS’s National Distribution Center (NDC) had
170,000 unprocessed orders for forms and data. The NDC handles both internal
and external requests for forms and data needed by various individuals in the
performance of their duties, both within the IRS and elsewhere. And while the
NDC was processing 11,000 orders per day, orders for Forms W-2 & W-3 were
not fulfilled until the middle of February 2019, even though the deadline for
employers to file the forms is January 31. Thus, the IRS was unable to provide
the forms needed by millions of employers to meet their tax-return-filing
obligations.
·
By the time the IRS fully reopened for business
in late January 2019, its return-processing inventory was up over 100 percent
from the same time the previous year. While the IRS brought back roughly 45
percent of its workforce about one week before the shutdown ended, the
onslaught of annual return filings had already begun. It would take the IRS
many months to dig out from the backlog. Overall return-processing rates were
down by 25.8 percent on the year.
·
The level of service provided by the IRS’s
Accounts Management phone lines, defined as the percentage of people who get
through to an IRS assister to have their issue addressed, was deplorable. In
the first week after the shutdown ended, the LOS was 36.8 percent, and the
average wait time for a caller was 32 minutes.
·
The level of service provided by the IRS’s
Installment Agreement/Balance Due phone lines — the lines people call to either
set up an installment agreement or get a payoff statement so they can pay what
they owe — was even worse: 12.8 percent, with an average wait time of 93
minutes. Within a week after the shutdown ended, the level of service provided
by some of the agency’s other phone lines began to improve, but not this one,
which degenerated even further to 6.7 percent.
The NTA sums up all of these problems as follows:
Make no mistake about it, these
numbers translate into real harm to real taxpayers. And they represent
increased rework for the IRS downstream, at a time when the IRS is already
resource challenged. The IRS will be facing tough decisions as it revises its
work plans for FY 2019 in light of the shutdown’s impact.
The Impact on
Taxpayers’ Rights
It is an understatement of epic proportion to say that
the IRS’s serious struggles have a negative impact on taxpayers’ rights. The
Taxpayer Bill of Rights declares that taxpayers have an absolute right to,
among other things, “quality service” when dealing with the IRS. The IRS is
obviously not providing taxpayers “quality service” now, and decisions made by
the agency’s lawyers long before the shutdown ensured that its service level
during the shutdown would be particularly awful.
Article I, Section 9, Clause 7 of the U.S. Constitution
stipulates that, “No Money shall be drawn from the Treasury, but in Consequence
of Appropriations made by Law.” The Anti-Deficiency Act that exists to enforce
that constitutional decree forbids any officer or employee of the United States
to involve his government employer in a contract or obligation for the payment
of money before an appropriation is made, unless otherwise authorized by law.
The Act makes an exception “for emergencies involving the safety of human life
or the protection of property.” But in 2013, the IRS’s Office of Chief Counsel
opined that “protection of property” refers only to “government property.” This
meant that during a government shutdown, including the most recent shutdown,
the NTA or any other IRS personnel expressly couldn’t act to protect
“taxpayers’ property” placed at risk. Per the NTA:
Neither of these exceptions would
allow [IRS] personnel to issue a refund or release a levy in order to allow the
taxpayer to obtain access to funds to receive a life-saving operation, for
example. Nor could the IRS use resources to release a levy where it is
depriving the taxpayer of funds to pay for basic living expenses, even if the
levy could leave the taxpayer homeless.
As a result, tens of thousands of taxpayers were utterly
defenseless during the latest shutdown:
The IRS’s authority to collect
revenue is not unconditional. It is conditioned on statutory protections, and a
lapse in appropriations does not eliminate those protections. It is
unconscionable for the government to allow its employees to enforce
collection of taxes without the concomitant taxpayer rights protections enacted
by Congress. Chief among those protections is the Taxpayer Advocate Service,
along with statutorily mandated releases of levies where a taxpayer is
experiencing economic hardship and withdrawals of notices of federal tax liens
which were premature or otherwise not in accordance with administrative
procedures, or in the “best interests of the taxpayer (as determined by the
National Taxpayer Advocate) and the United States” or where it furthers the
collection of tax or the taxpayer has entered into an installment agreement.
It’s not as if the IRS, knowing that its agents couldn’t
take remedial action during the shutdown, stopped enforcement actions while the
agency was on furlough. 9,946 IRS employees remained on the job during the
shutdown — about 12.5 percent of the agency’s workforce. Several thousand of
them worked on either audits or collections.
Moreover, thousands of notices were issued either
immediately before or during the shutdown which imposed significant deadlines
on taxpayers. Over 53,818 lien or levy Collection Due Process notices were
mailed during the shutdown, all of which gave recipients a thirty-day statutory
deadline for seeking a Collection Due Process hearing. Missing such a deadline
means the IRS can levy and seize a taxpayer’s property at will. Another 18,406
actual wage and bank levies were issued pre-shutdown, putting the subject
citizens in a position where they could not get IRS personnel on the phone to
release the levies.
Concerning audits, IRS personnel made 18,570 demands for
supporting documents before the shutdown, each with a thirty-day window to
comply. Most of those thirty-day windows expired amid the ongoing shutdown,
while 88 percent of the IRS’s workforce was furloughed. Imagine the level of
anxiety for people facing enforcement actions with nowhere to turn for relief.
The NTA explains it this way:
When the IRS is shut down, it is
impossible for the taxpayer to get the information and assistance needed to
move forward. With respect to notices of levy, if the taxpayer cannot contact
the IRS and make other payment arrangements within 21 days of the issuance of
the levy, the employer or financial institution must pay over the funds to the
IRS. The 21-day period for over 18,000 levies expired during the shutdown.
The IRS Is in a
Downward Spiral
The IRS touches the lives of just about every citizen,
regardless of age and income level. Even those with no income-tax liabilities
must file tax returns to get their refunds and claim the EITC and other
benefits. For decades, the agency has been victimized by “mission creep,” asked
to do more and more work unrelated to its core mission of tax administration
and enforcement. The endless stream of new laws and administrative decisions has
put greater burdens on both citizens and the IRS.
Never mind the Byzantine tax code itself. The scope and
complexity of the IRS’s administrative systems, with which the average person
is expected to interact, are so vast and intertwined that it is unreasonable to
expect people to understand and use system. Average citizens generally have no
clue where they are in the tax-filing process, and the tax pros they hire are
often not much better off.
In short, the system has reached a dangerous level of
complexity that neither taxpayers nor the agency itself are properly equipped
to handle. It is now in danger of collapsing under its own weight. All that’s
left to be determined is how much damage such a collapse would inflict on
hundreds of millions of honest Americans.
No comments:
Post a Comment