NTA Blog: National Taxpayer Advocate Urges Congress to Maintain IRS Appropriations But Re-Direct Some Funds Toward Taxpayer Service and Information Technology Modernization

March 16, 2023 – Large U.S. banks spend between $10 billion and $14 billion a year on technology, often more than half on new technology systems.

Yet in fiscal year (FY) 2022, Congress appropriated just $275 million for the IRS’s Business Systems Modernization (BSM) account. That’s less than five percent of what the largest banks are spending on new technology each year, and the IRS serves far more people and entities than any bank.

This comparison isn’t exactly apples-to-apples because there are differences in the components of the banks’ technology accounts and the IRS’s BSM account. But overall, the comparison tells you everything you need to know to understand why the IRS is still using antiquated information technology (IT) systems, some dating to the 1960s, and why taxpayer service has been abysmal in recent years.

For at least the past several decades, the IRS has been chronically underfunded, rendering it unable to deploy current technology or hire sufficient staff to meet taxpayer needs. And then between 2010 and 2020, funding for the IRS was reduced on an inflation-adjusted basis by nearly 20 percent.

Last August, Congress tried to solve these problems by giving the IRS nearly $80 billion over the next ten years through the Inflation Reduction Act of 2022 (IRA) as a supplement to the funding it receives through the annual appropriations process. That’s good news.

But there is also some bad news: The IRA allocated the funds in a manner that does not address the needs of U.S. taxpayers, including individuals, families, and businesses.

Congress funds the IRS through four accounts: Taxpayer Services, Enforcement, Operations Support (which largely pays for hiring, rent, IT services, and related expenses associated with Taxpayer Services and Enforcement employees), and BSM. Of the nearly $80 billion in supplemental IRA funding, $3.2 billion was allocated for Taxpayer Services and $4.8 billion was allocated for BSM. Combined, that’s just ten percent of the total. By contrast, 90 percent was allocated for Enforcement ($45.6 billion) and Operations Support ($25.3 billion).

This failure to provide sufficient funding for Taxpayer Services and BSM is unwise for two reasons. First, the top tax administration priority now should be to improve taxpayer service, particularly after the struggles of the last few years, and to do that, the IRS needs more funding in the Taxpayer Services and BSM accounts. Second, the IRS must strike an appropriate balance between serving taxpayers and enforcing the law. In its annual appropriations acts, Congress is currently funding enforcement and taxpayer service at a ratio of about 2:1. The IRA allocation alters this delicate balance. It funds enforcement and taxpayer service at a ratio of more than 14:1.

I don’t mean to downplay the IRS’s important role in enforcing the tax laws that Congress has written. Enforcement is an essential IRS function and an important component of tax compliance when applied fairly and equitably. The IRS recently estimated that the amount of tax due but not paid (the “tax gap”) during the 2017-2019 period averaged $470 billion a year. Both the federal government’s revenue needs and fairness for U.S. taxpayers who pay their taxes require that the IRS do better at compliance. But enforcement is just one component of an effective compliance strategy. The most efficient way to improve compliance is by encouraging and helping taxpayers to do the right thing on the front end. That is much cheaper and more effective than trying to audit our way out of the tax gap one taxpayer at a time on the back end.

For anyone following tax administration in recent years, it’s a no-brainer that the areas that require improvement most urgently are taxpayer service and technology. And if the IRS would provide timely and clear guidance, more transparency, and more front-end services in a proactive manner, it could reduce back-end enforcement needs. Successful tax administration requires taxpayers to voluntarily file, self-assess, and pay the taxes due under our nation’s tax laws. Successful tax administration also requires the IRS to provide congressionally authorized benefits and credits quickly and efficiently.

Our tax laws, coupled with the IRS’s administration and collection of taxes, provide Congress with the ability to fund federal programs. In FY 2022, the IRS collected about $4.9 trillion in gross revenue, representing well over 90 percent of the gross revenue of the United States. The success of our nation is closely tied to the success of the IRS.

To illustrate where taxpayer service is falling short, here are a few examples of poor service that have undermined the IRS’s mission and failed to meet the needs of U.S. taxpayers:

During the last two years, tens of millions of taxpayers have experienced delays that at times exceeded ten months to get their returns processed and receive refunds, including refundable credits.
Millions of taxpayers who responded to IRS notices have waited an average of more than six months for the IRS to process or otherwise address their correspondence.
Businesses and individuals have waited unacceptably long periods to receive refunds generated by the carryback of losses, as authorized by the Coronavirus Aid, Relief, and Economic Security Act. The delays undercut Congress’s goal of providing quick relief during the pandemic.
Taxpayers who allege they are victims of identity theft and submit identity theft affidavits are still waiting more than a year, on average, for the IRS to resolve their cases.
During the past few years, trying to reach the IRS by phone was next to impossible. IRS employees answered just 11 percent of taxpayer telephone calls in FY 2021 and 13 percent in FY 2022. (For the current filing season, the IRS has used IRA funding to hire more than 5,000 additional customer service representatives, and telephone service has improved substantially.)

And here are a few examples that illustrate the magnitude of the IRS’s technology deficiencies, which are the source of many of the taxpayer service problems:

The IRS still doesn’t machine read most paper-filed tax returns. Over the last two years, the IRS received about 30 million paper-filed individual income tax returns (Forms 1040) and millions of additional paper-filed business tax returns. In the year 2023, it is unacceptable that IRS employees are still re-typing the numbers from each return, digit by digit, into IRS systems. The lack of scanning technology has been a major source of processing and refund delays. On March 8, the IRS announced plans to implement scanning technology, which is a positive development, but it still has a long way to go.
IRS divisions still use about 60 different case management systems that generally don’t communicate with each other. When a taxpayer calls with an account question, the taxpayer often needs to be transferred, sometimes more than once, to a unit that can access the system on which the relevant information resides. IRS leaders have been talking about building an integrated case management system for years. This needs to happen to enhance taxpayer services by providing individuals and businesses with the help they deserve.
The IRS has not completed the modernization of its Individual Master File and its Business Master File, which are the foundation for taxpayer records and key to modernizing IRS’s systems.
Individual taxpayers’ online accounts do not provide robust functionality competitive with financial institutions. And the IRS doesn’t offer businesses any online account option or provide practitioners with online access to their clients’ account data.

My office doesn’t have the financial expertise to determine the costs associated with each initiative. But at a high level, two things are clear: (1) the IRS needs substantially more funding than it was receiving in annual appropriations bills to better serve U.S. taxpayers, and (2) the additional funding provided by the IRA, while appreciated and welcomed, is disproportionately allocated for enforcement activities and should be reallocated to achieve a better balance with taxpayer service needs and IT modernization. We need to put taxpayers first.

There are at least four possible ways by which Congress can ensure the IRS has enough funding to serve taxpayers effectively:

Congress can pass stand-alone legislation that reallocates the IRA funding to ensure Taxpayer Services and BSM are adequately funded.
If legislation to modify the IRA isn’t feasible, Congress can adjust the funding allocations among the four budget accounts in annual appropriations bills to achieve the same result (i.e., Congress can move some funding from the Enforcement account to the Taxpayer Services and BSM accounts).
Congress can build more flexibility into appropriations legislation to allow the IRS to transfer additional funds from the Enforcement account to the Taxpayer Services and BSM accounts.
Congress can expand the scope of IRS activities payable from the Enforcement account. To cite an example close to home, the organization that I lead, the Taxpayer Advocate Service, is currently funded entirely from the Taxpayer Services account. However, TAS works around 250,000 cases per year, and many of them result directly from IRS enforcement actions (e.g., collection cases). When a TAS case arises solely because of an IRS enforcement action, there is a strong if not compelling argument that the downstream costs associated with that enforcement action should be charged to the Enforcement account.

I am not a budget expert and am indifferent as to how the funding gets reallocated. As the National Taxpayer Advocate, my goal is simply to ensure that taxpayer needs are met – that the IRS processes tax returns and correspondence quickly and accurately, that eligible taxpayers receive prompt refunds, that taxpayers can obtain answers to their tax-law-questions, that taxpayers can fully interact with the IRS online, that taxpayers can speak to an IRS employee by phone or in person, and that IRS compliance activities are fair and equitable.

A final observation: The IRS has had a mixed record with IT projects in the past. Congress has sometimes responded by reducing its funding. I understand the frustration, but that’s not the right answer for taxpayers or tax administration. The reality is that whether in the public sector or the private sector, some IT projects fail. Other IT projects experience delays and cost overruns. That comes with the territory.

However, when a financial institution (or any business) is trying to upgrade a critical system to meet customer needs and the project doesn’t succeed, the board of directors isn’t likely to respond by slashing or zeroing out the company’s IT budget. Rather, it may retool the project, bring in consultants to provide closer oversight, or even change project leadership, but it will continue to dedicate funds to build essential systems that meet its business and customer needs and keep up with the competition. Congress should apply a similar approach to IRS IT projects. We need to keep our eye on the ball – doing what is required to meet taxpayer needs and support effective, fair, and equitable tax administration.

Now that the Administration’s FY 2024 budget proposal has been released, Congress will begin to develop the IRS’s budget for the upcoming year. I ask Members of Congress to find a way to provide greater funding for taxpayer services and IT modernization.

Conclusion

I believe we are all trying to achieve the same result: A fair and equitable tax system that both (1) collects the tax revenue required to operate the government in accordance with congressionally enacted statutes and (2) respects taxpayer rights by making compliance as easy and painless for taxpayers as possible.

To achieve that result, taxpayer service and technology must improve. Our nation’s taxpayers deserve a responsive and respectful tax administration that serves all taxpayers fairly, is not overly burdensome for individuals, families, and businesses, and instills trust in our tax system. In short, both individual taxpayers and business taxpayers deserve a well-functioning IRS.

I look forward to working with the appropriate congressional committees in the coming months to help ensure funding decisions are made that best meet the needs of U.S. taxpayers.

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