Atlas Shrugged At IRS

The agency needs more auditors, greater efficiency and computer systems that weren’t made in the ’60s.

by Jay Starkman, CPA

[A version of this article (without footnotes) appeared in The Wall Street Journal on February 16, 2022, p. A17, with the title, “Good News, Tax Evaders! The IRS Can’t Keep Up.”]

The Internal Revenue Service is the motor that keeps America’s government running, and it is sputtering. Its computer systems are more than 50 years old. Taxes are going unpaid because returns aren’t being processed. Phone calls go unanswered and correspondence takes almost a year to process. The caseload of the Taxpayer Advocate Service — a division that “helps taxpayers solve problems with the IRS and recommends changes to prevent them assists taxpayers” — rose 58% from 2017 to 2021.

The IRS has been overwhelmed for years, but the problem became acute with the 35-day partial government shutdown between December 2018 and January 2019.

At a crucial time for training staff and preparing for the 2019 tax filing season, the agency halted most of its work. It ended up with a backlog of five million unanswered pieces of mail. In January 2019, the National Taxpayer Advocate told congressional staff it likely would take at least a year for the IRS to return to normal operations.¹

Then Covid hit and in March 2020, the IRS shut its tax-return-processing centers, reopening some late the following month. Most tasks in these centers, such as opening mail or depositing checks, can’t be done remotely.

Last week National Taxpayer Advocate Erin Collins told Congress that as of May 2021, the IRS had a backlog of more than 35 million tax returns requiring manual processing² — including returns filed electronically — and nearly five million pieces of unprocessed paper correspondence. That backlog of both returns and correspondence is now down to 23 million pieces, Ms. Collins said.³

A decade of budget cuts have thinned the agency’s ranks. At the end of 2021, the IRS had 83,265 employees, down from 94,000 in 2011. Among them, only 7,177 are younger than 30, and 2,384 under 25. With retirements in coming years, promotion opportunities will abound, but hiring has been difficult.

Ms. Collins told Congress that the agency recently advertised 5,000 openings for return processors and other jobs, and has filled only 179. ⁴ Last month, the Office of Personnel Management raised the minimum pay for IRS and other federal employees to $15 an hour.

Meantime, the IRS’s work has grown more demanding owing to complex tax laws and social programs, such as ObamaCare, three stimulus payments, child credits and employer Covid tax credits. Further straining the budget is the need to employ bilingual agents and translate forms and publications into 25 languages.

The IRS says it constantly updates its technology infrastructure but its core tax- processing system was created in the 1960s and is antiquated. Overhauling the technology would require major funding and talent. The IRS still uses Cobol, a programming language conceived in 1959 whose syntax and structure are inconsistent with modern computer languages.

Each year, that archaic system spews out millions of proposed adjustments to taxpayers. This triggers a vicious circle, in which erroneous notices generate a torrent of phone calls and mail that go unanswered. In June, IRS Commissioner Charles Rettig told Congress, “We receive between one and 1½ million pieces of mail per week. All of the mail is opened within a week of receipt.”⁵ Opened, perhaps, but replies take months.

Ms. Collins wrote in her 2021 annual report to Congress, that at one point during the 2021 filing season, the IRS was receiving 1,500 calls a second. ⁶ Out of 150 million calls last tax season, 7% were answered. Only 3% of the 85 million callers seeking help with the individual tax Form 1040 reached a representative.⁷ Call answering “improved” to 11% for all of 2021.⁸

An enterprising robo-calling firm, enQ Inc., now ties up IRS phone lines, selling a place in line it has been holding to subscribers, saving up to an hour on hold. I found reaching IRS can be faster by choosing Spanish, and requesting help in English when the bi-lingual agent answers.

Under heavy criticism, IRS says it will stop using a contractor called, ID.me, for identity verification which requires biometric facial recognition technology, subject to a 4,500-word privacy policy and 6,000-word terms of service that very few people read. Why should IRS, which has more information on Americans than any private enterprise, need a third party for ID verification? Previous technology partners, like SolarWinds and Equifax are not totally secure and have been hacked. Last June, ProPublica published what it called, "a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation's wealthiest people, covering more than 15 years." There has yet been no explanation on how this illegal breach and leak occurred, despite the requirement that every employee access to taxpayer files must be logged in.

While the IRS says its budget is under greater strain than ever, there is no explanation why $1 billion appropriated in March 2021 remains unspent.¹⁰ Much of the $250 million annual technology modernization appropriation since 2006 goes to maintain legacy systems, Ms. Collins told lawmakers.¹¹ A May 2021 report from the Treasury Inspector General for Tax Administration found that 42% of printers and copiers at three IRS tax-processing centers last March were unusable or broken.¹² Because the IRS lacks scanning technology, staffers type in data for many paper returns.¹³

The IRS is on the verge of collapse. Some members of Congress are fixated on the “tax gap” — uncollected tax revenue the Biden administration estimates varies from $400 billion to $1 trillion. That guesstimate isn't derived from audit statistics nor validated by sufficiently increased tax receipts from more onerous information reporting. The IRS could collect taxes better if it were efficient, fully staffed and had up-to-date technology, responsive customer service and reasonable audit coverage. The tax gap will never be eliminated entirely, because it includes the underground economy.

There is a need for some additional auditing, though not the ten-fold increase in auditors envisioned by the Biden Administration. Out of four million partnership returns filed in 2018, just 140 were audited, a 0.0035% audit rate that encourages aggressive tax positions.¹⁴ With only 6,500 field agents,¹⁵ IRS is outgunned and the statute for auditing a return may expire before IRS has the chance, especially if paper-filed. After losing in Tax Court, Coca-Cola recorded a tax reserve of just $438 million against a disputed $14 billion assessment — an amount almost equal to the annual IRS budget — sufficiently confident is Coke of winning on appeal.¹⁶ This is a very big bet by management as it exceeds annual net income, and total equity is about $28 billion.

Like the dystopian world of novelist Ayn Rand's famous book, IRS is teetering on collapse. Congressional Democrats and Republicans may disagree on whether the IRS’s problem is money or management but they agree that the agency can’t keep deteriorating.

FOOTNOTES

¹ "IRS will need at least a year to recover from government shutdown, watchdog tells Congress," Washington Post, 26 Jan 2019.

² Written Statement of Erin M. Collins, National Taxpayer Advocate," 8 Feb 2022, p 2.

³ Erin Collins "23 million" at 49:30, Ways & Means Oversight Committee Hearing, 8 Feb 2022.

⁴ Erin Collins at 51:12, Ways & Means Oversight Committee Hearing, 8 Feb 2022.

⁵ Comm'r Rettig at 54:55, Senate Finance Committee Hearing, June 8, 2021.

⁶ "National Taxpayer Advocate Objectives Report to Congress, Fiscal Year 2022," pg. v.

⁷ Erin Collins at 51:12, Ways & Means Oversight Committee Hearing, 8 Feb 2022.

⁸ "National Taxpayer Advocate Annual Report to Congress, 2021," pg 6 and pg 21;

⁹ Letter Mr. Blake Hall, CEO ID.me, House Committee on Oversight and Reform, April 14, 2022; Laura Saunders, "They’re Your IRS Records. Getting Them Means Giving Up Privacy," Wall St. Journal, 29 Apr 2022; "The Emerging Taxpayer Data Protection Problem," Tax Notes, 12 Jul 2021; " ID.me Expected to Be Available for IRS Tax Pro Account This Month," Tax Notes, 15 Nov 2021; IRS Sign-in with ID.me (visited 11/17/22)

¹⁰ "IRS Backlog Crisis Fuels Division Over Funding at House Hearing," Tax Notes, 9 Feb 2022. See $1.4B unspent: PL 117-2, HR 1319, Sec. 9601(d) for appropriation; Ways & Means Oversight Committee Hearing, 8 Feb 2022.

¹¹ Rep. Rice at 53:00 and Erin Collins at 1:05:24, Ways & Means Oversight Committee Hearing, 8 Feb 2022.

¹² "Interim Results of the 2021 Filing Season," Treasury Inspector General For Tax Administration, Rpt #2021-40-038, 6 May 2021, pg 8.

¹³ Erin Collins at 50:18, Ways & Means Oversight Committee Hearing, 8 Feb 2022.

¹⁴ Wyden, June 8, 2021 opening statement, Senate Finance Committee Hearing on the IRS’s Fiscal Year 2022 Budget, 8 Jun 2021. Wyden wrote, "It’s an audit rate of 0.00004 percent." His math is wrong. 140/4010200 = 0.000034911 = 0.0035% (rounded). 4,010,200 partnership returns were filed in 2018 per IRS statistics.

¹⁵ Comm'r Rettig at 1:01:57, Senate Finance Committee Hearing, 8 Jun 2021.

¹⁶ The Coca-Cola Co., 155 T.C. No. 10 (2020); Coca-Cola 2/10/21 Form 8-K Exhibit 99.2; "Coca-Cola’s U.S. Transfer Pricing Dispute May Cost $12 Billion," Tax Notes, 11 Feb 2021, Doc 2021-5469; "The Company’s conclusion that it is more likely than not the Company’s tax positions will ultimately be sustained on appeal is unchanged as of September 29, 2023. However, ..." Coke then hedges that should it lose, the liability would now be about $15.6 billion, and would "increase the Company’s effective tax rate by approximately 3.5%." The Coca-Cola Company, Form 10Q, 30 Sept 2023, Legal Proceedings.

END OF FOOTNOTES

A version of this article (without footnotes) appeared February 16, 2022, on page A17 in The Wall Street Journal with the title, "Good News, Tax Evaders! The IRS Can’t Keep Up."