The agency and the tax-collection system it oversees are on the brink of catastrophic collapse.
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 a 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 Tax Cuts and Jobs Act(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 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 proportions 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 excessively complicated 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 the 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.