Why Another Brutal Filing Season for The IRS May Not Help It Get More Funding

The Internal Revenue Service has limped through yet another tax filing season, reduced to plugging staffing holes in customer service and returns processing by shifting workers around—and thus creating new tax administration gaps. Thanks to months-long delays in processing millions of 2020 tax returns, the agency’s most visible vulnerabilities have shifted from enforcement to customer service. And that has ominous implications for the ability of one of the nation’s least-loved government offices to secure much-needed funding.

Simply put, while we know that spending money on enforcement will yield a positive net return, audits are politically unappealing to many lawmakers.

By contrast, many lawmakers’ constituents want improvements in customer service. But neither the Treasury Department nor the Congressional Budget Office have ever produced estimates of any net new revenue attributable to additional funding for answering calls or running assistance centers.

And it’s easy to see why. More customer services could lead to more accurate returns and more collections. Or they could result in more accurate returns and more payments of refundable tax credits. Estimating how revenues would change if Congress gives the IRS more funding for customer services is little better than a coin flip.

That creates an only-in-Washington paradox: Lawmakers may deplore the IRS’s customer service, but they don’t appear willing to spend the billions needed to kickstart the IRS without a guarantee of a positive monetary return on that investment.

Not long ago, analysts were cautiously optimistic about the IRS getting more funding, especially for tax enforcement. Just last year, President Biden proposed a multi-year $78 billion increase over the next decade—roughly a 55 percent boost relative to current funding, adjusted for inflation. Treasury and CBO differed widely on how much revenue that proposal would raise, but both agreed that more money would flow in than out.

For a starved and battered agency, $78 billion would be a lifeline as well as a recognition of its ever-growing list of responsibilities, added by the same Congresses that repeatedly cut its budget. And it also would give the IRS a chance to reverse a decade-long decline in its audit rates (especially for the wealthy and big businesses) and a decade-long increase in its unproductive audits of large corporations.

But the conversation has changed.

No, audit rates have not spontaneously returned to levels not seen in a decade. We’re now talking—and, in the case of my TPC colleague Howard Gleckman, writing—about delays in refunds and unanswered phone calls.

Then there were the millions of notices to taxpayers telling them of errors in their computation of the recovery rebates, and an unknown number of letters warning taxpayers they failed to file a return even though the IRS cashed their checks (I hear you, Howard). And that’s just for last year’s filing season.

It’s never a good sign when the IRS Commissioner opens the filing season by effectively channeling Bette Davis in All About Eve and warning taxpayers to fasten their seatbelts, it’s going to be a bumpy season.

The IRS entered the year literally with a paper jam—a backlog of mostly paper tax returns that needed to be processed manually. Reconciling the advance child tax credit with the correct credit amount promises to be a much greater nightmare than the more taxpayer-friendly recovery rebates.

While Commissioner Charles Rettig called in the calvary, it has been late to arrive. For more than two years, the IRS has asked for direct hiring authority that would allow it to skip some steps when recruiting staff. The Office of Personnel and Management finally approved the request—last month. And while the IRS quickly posted help wanted signs for 5,000 employees, it was too late to help with this year’s tax filing season.

Last month, Congress finally gave the IRS a budget increase: $675 million in new funding for FY 2022. To put that number in perspective, it’s 1 percent of the increase in Elon Musk’s wealth in the past year. And it left the IRS $100 million short of what it needs just to cover operations support at last year’s level. For FY 2023, the Administration is asking for an additional $1.5 billion, with 60 percent of that amount going to taxpayer services.

Maybe the IRS will get at least some of the multi-year budget hike proposed by Biden. But that money appears tied irrevocably to the long-stalled Build Back Better Act. The Administration says it’s still committed to a multi-year increase in the IRS’s enforcement budget, but words did not translate into dollars in their FY 2023 budget.

And so once again, the question is: Can a battered agency do its job?

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