The tax-filing season has just begun, and the Internal Revenue Service (IRS) has already projected widespread delays and backlogs. While pandemic-related factors have complicated what is a Herculean task under the best circumstances, the current crisis is the direct result of more than a decade of budget cuts that have left the IRS understaffed, with antiquated technology, and poorly equipped to meet its current challenges. These cuts translate into real consequences for millions of American families who face delays in getting the answers they need to file their tax returns and who will wait longer to receive the tax refunds they depend on to make ends meet. Budget cuts and resulting IRS staff reductions have also allowed some wealthy individuals to evade paying the taxes they legally owe due to the agency’s diminished enforcement capacity.
The IRS was already struggling when COVID-related health and safety considerations led to office closures and other workforce impacts, and the demands imposed by pandemic relief programs implemented through the tax code combined to create a situation of near-crisis proportions. Relief efforts, including three rounds of economic impact payments and monthly advance child tax credit (CTC) payments, alongside policy changes such as the employee retention credit and reductions in the taxation of unemployment insurance payments, imposed substantial demands on the agency’s systems. This required the IRS to divert resources from ongoing tax administration responsibilities. The agency quickly ramped up to issue 478 million stimulus payments and sent advance CTC payments totaling more than $93 billion to more than 36 million families. Processing center closures during the early days of the pandemic created backlogs in unopened mail and inventory processing. While unopened mail is now below historic levels, the IRS entered the current filing season with more than 10 million unprocessed returns, and news reports suggest that as many as 24 million prior-year returns remain unprocessed.
Congress has two opportunities to address the IRS funding gap
In the coming weeks and months, Congress will have two opportunities to provide the IRS with the funding it needs to provide tax filers with the quality services they deserve and to ensure that honest taxpayers get a fair deal and others cannot avoid the taxes they legally owe.
Fully fund the president’s budget request for FY 2022
Congress has yet to approve the appropriations bills needed to authorize funding for the discretionary part of the federal budget. The IRS, along with other federal agencies, are currently operating under a stopgap measure—known as a continuing resolution—that expires on March 11. The continuing resolution only provides funding at the prior year’s level, even though the costs of maintaining the same level of service rise due to inflation and other factors. The administration’s fiscal year 2022 request would increase funding by 10.4 percent over FY 2021 levels—with the largest gains slated for upgraded technology and customer service—and provide an additional $417 million as a first step toward addressing long-term IRS funding needs. The additional allocation would be made outside of the limit applied to overall appropriations because it strengthens the agency’s compliance capacity. Similar adjustments have been made for other federal programs in the past, and the administration’s request would expand that authority to include the IRS. The U.S. House of Representatives-passed appropriations bill and the Senate Committee on Appropriations proposal would both fully fund the administration’s request, making a modest first step toward rebuilding the IRS.
Enact proposed IRS modernization efforts included in the Biden administration’s tax compliance agenda
The administration’s proposal, which was included in the House-passed Build Back Better Act, provides $80 billion over the next decade to modernize the agency through new technology and in other ways that would improve customer service and increase tax compliance. Additional resources would begin to alleviate the impact of prior budget cuts and help the IRS respond to emerging challenges, such as cryptocurrency and the rise of the platform economy. Stable, multiyear funding would enable the IRS to recruit skilled staff and upgrade the agency’s severely outdated technology while restoring its ability to provide basic services to taxpayers. At the same time, it would raise substantial additional revenue by helping to close the tax gap—the gap between taxes that are owed and the amount that is actually collected—with a focus on the highest-income earners, who are responsible for a majority of unpaid taxes.
Stable, multiyear funding would enable the IRS to recruit skilled staff and upgrade the agency’s severely outdated technology while restoring its ability to provide basic services to taxpayers.
By doing so, experts widely agree that the $80 billion investment will more than pay for itself. Estimates from the U.S. Department of the Treasury’s Office of Tax Analysis estimate that the $80 billion funding infusion would generate $480 billion in additional revenue—a net benefit of $400 billion. Other expert analyses estimate that increased funding could result in as much as $1.4 trillion over the next decade. The Congressional Budget Office released an unofficial estimate that is much more conservative for various reasons but nonetheless finds that the initiative will raise $127 billion in net revenue.
The current problems are the result of long-term disinvestment
While COVID-related factors worsened the current problems, IRS customer service and enforcement efforts suffered from disinvestment long before the start of the pandemic. As the agency’s taxpayer advocate—an independent watchdog—noted in her most recent report, “One irony of the past year is that, despite its challenges, the IRS performed well under the circumstances.”
Backlogs, delays, and other problems are the direct result of decades of budget cuts and deliberate efforts by anti-tax lawmakers to undermine the agency’s ability to collect the taxes that support the federal budget.
Backlogs, delays, and other problems are the direct result of decades of budget cuts and deliberate efforts by anti-tax lawmakers to undermine the agency’s ability to collect the taxes that support the federal budget. Funding for the IRS is roughly 20 percent lower now than it was in 2010 after adjusting for inflation, with the deepest cuts made to enforcement. In contrast, the number of individual tax returns filed—a proxy for IRS workload—rose by 19 percent over the same period. The agency was subject to a hiring freeze from 2011 through 2018 that, when coupled with attrition, led to a dramatic fall in the number of employees available to help customers. As documented in the latest report by the IRS’ taxpayer advocate, funding reductions have left the agency with fewer employees than at any time since the 1970s and with the oldest technology systems in the federal government.
Budget cuts have also hindered the agency’s ability to carry out its most basic functions. Questions about pandemic relief pushed customer service call volumes to record levels with a three-fold increase between FY 2020 and FY 2021. However, because of staffing shortages, among other factors, IRS assistors answered just one out of every nine calls in FY 2021.
Figure 2
Even prior to the pandemic, budget cuts left the agency ill-equipped to meet the demands of an increasing population and a more complex economy and translated directly into service reductions and diminished enforcement capacity. In 2018, for example, the IRS answered roughly one-third of the phone calls seeking front-line assistance, while the share of corporate and individual tax returns examined by the IRS dropped by roughly 80 percent from 2010 to 2018.
Underfunding allows tax dodging, especially by the wealthy and corporations, to run rampant
Roughly $600 billion in legally owed taxes go unpaid each year, a loss equal to the income taxes paid by the lowest-earning 90 percent of taxpayers. Research cited by Treasury Department officials estimate that a full 28 percent of this loss is attributable to taxes that the wealthiest 1 percent owe but choose not to pay. Underfunding has diminished the ability of the IRS to pursue and collect unpaid taxes, particularly those associated with high-net worth individuals and complex ownership structures such as partnerships and multinational corporations. As a result of budget cuts and attrition, the IRS has lost nearly one-third of its full-time enforcement staff, and audit rates for the wealthiest households—those with incomes greater than $10 million—and corporations with more than $20 billion in assets dropped by 75 percent and 58 percent, respectively, from 2010 to 2018. Lack of resources for adequate enforcement will likely prevent the IRS from pursuing more than 500,000 high-income nonfilers who owe an estimated $24.9 billion in unpaid taxes. Both the current and former IRS commissioners have cautioned that not only is the current gap large, but absent resources and deliberate action, it will continue to grow.
Underfunding has diminished the ability of the IRS to pursue and collect unpaid taxes, particularly those associated with high-net worth individuals and complex ownership structures such as partnerships and multinational corporations.
While diminished resources have caused the IRS to audit a smaller share of tax returns across the board, the drop has been less steep at the bottom of the income distribution and, particularly, among households claiming the earned income tax credit (EITC). This disparity largely reflects resource constraints: Audits of EITC recipients are less complicated and less costly to pursue but also affect a much smaller share of the tax base than those of high-income filers and large corporations. EITC recipients and other low-income filers are the targets of more than half of all correspondence audits—a letter notifying the taxpayer that they are the subject of an audit. If selected for a correspondence audit, according to the most recent report of the IRS taxpayer advocate, “[T]he taxpayer is not given a direct phone number,” and contacting the agency “can be nearly impossible,” leaving households trying to navigate complex rules without assistance and at risk of losing benefits they need to help make ends meet.
Figure 3
Delays disproportionately affect low-income households
Low-income families are disproportionately affected by IRS backlogs and delays. As a result, millions of households that depend on the EITC and the CTC to make ends meet experience hardship when refunds are delayed. Workload challenges in the current filing season will add to this burden. As part of the American Rescue Plan Act of 2021, Congress expanded the CTC and allowed families to claim half of the credit in the form of monthly payments. While a substantial fraction of households with children received CTC advance payments, the poorest households—those with incomes of less than $25,000—are less likely to have received the credit in advance and will be eligible to claim the full credit when they file their 2021 tax returns. Households that have yet to claim some or all of the credits that they are eligible for—and potentially other benefits such as economic impact payments—can do so by filing their tax returns. However, processing delays will slow the flow of funds into families’ pocketbooks, where they can be used to help families pay for rent, food, clothing, and other necessities.
Conclusion
Rebuilding the IRS’ ability to provide quality customer service, while ensuring that taxpayers pay amounts that are owed, will require a substantial, multiyear increase in funding. Congress can take an important first step by fully funding the administration’s FY 2022 budget request. However, sustained progress will require substantial investment such as the $80 billion included in the House-passed measure and should be a high priority for congressional action.