The National Taxpayer Advocate’s report says the reduction in IRS funding since FY 2010, approximately 20 percent in inflation-adjusted terms, has challenged the agency’s ability to perform the basic tasks of administering the tax system. “As the National Taxpayer Advocate, I see daily the consequences of reduced funding of the IRS and the choices made by the agency in the face of these funding constraints,” Olson wrote in the preface to the report. “These impacts are real and affect everything the IRS does. Funding cuts have rendered the IRS unable to provide acceptable levels of taxpayer service, unable to update its technology to improve its efficiency and effectiveness, and unable to maintain compliance programs that both promote compliance and protect taxpayer rights. ’Shortcuts’ have become the norm, and ‘shortcuts’ are incompatible with high-quality tax administration.”
The report says the IRS is already struggling to meet the service needs of U.S. taxpayers, particularly with regard to telephone service. In most years, the IRS receives more than 100 million telephone calls. Even prior to the enactment of the tax reform legislation, the IRS was projecting it would only be able to answer about six out of 10 calls from taxpayers routed to speak with a telephone assistor during the filing season and about four out of 10 taxpayer calls during the full fiscal year.
Beginning in 2014, the IRS sharply curtailed the scope of tax-law questions it answers. It now answers only “basic” questions during the filing season and it does not answer any tax-law questions after the April 15 filing deadline. The report says the challenges of operating with a substantially reduced workforce have been compounded by a significant reduction in the training budget for the employees who remain. Since FY 2009, the IRS’s employee training budget has been cut by nearly 75 percent.
While Olson said the IRS needs additional funding, she also expressed concern that the agency has sometimes been too quick to cite funding constraints as a basis for inaction. “Limited resources cannot be used as an all-purpose excuse for mediocrity,” she wrote. “There is not a day that goes by inside the agency when someone proposes a good idea only to be told, ‘We don’t have the resources.’” Notwithstanding funding constraints, she said there are steps the IRS can take to improve taxpayer service through creativity and innovation.
Still, the report says the implementation of major tax legislation is always a heavy lift for the agency. Following enactment of the last major tax reform legislation, the Tax Reform Act of 1986, the IRS made changes to 162 existing forms, developed 48 new forms, and created 13 new publications. Call volume increased by 14 percent, and the IRS hired an additional 1,300 staff, increased phone capacity by 30 percent, and expanded hours and phone service to Saturdays.
More recently, enactment of the Economic Stimulus Act of 2008 generated significant processing work and produced a deluge of telephone calls, with incoming calls on the Accounts Management telephone lines rising from about 66 million in FY 2007 to about 151 million in FY 2008 – an increase of more than 125 percent.
The IRS has not yet developed a final cost estimate to implement the new law, but a preliminary estimate from earlier in the year projected the agency would require additional funding of $495 million in fiscal years 2018 and 2019. Implementation challenges include programming and systems updates, answering taxpayer phone calls, drafting and publishing new forms and publications, revising regulations and issuing other guidance, training employees on the new law and guidance, and developing the systems capacity to verify compliance with new eligibility and documentation requirements.
As one example of the challenges, the new law reduces the maximum home mortgage eligible for the mortgage interest deduction from $1,000,000 to $750,000 for indebtedness incurred after Dec. 15, 2017. It provides an exception for most (but not all) refinancings and an exception for some loans closed after Dec. 15, 2017 pursuant to binding purchase contracts. At present, the IRS generally does not know the date of a mortgage closing, the terms of a refinancing, or the date or terms of a purchase contract. It will have to develop clear guidance for taxpayers and develop forms and systems capacity to distinguish between loans subject to the $1,000,000 cap and loans subject to the $750,000 cap.
At the time it developed its preliminary cost estimate, the IRS had identified 131 filing season systems that will be impacted by the new legislative provisions and must be modified to, among other things, reflect new individual and business tax rates, inflation-indexing changes for deductions and credits, phase-out changes for certain tax benefits, elimination of certain tax benefits, and changes in law that will require updating the IRS’s fraud-detection filters.
“The IRS will have its hands full in implementing the new law,” Olson said in releasing the report. “We have already seen confusion about withholding changes, confusion about the deductibility of prepaid property taxes, and confusion about whether states can allow taxpayers to make charitable contributions in lieu of taxes as a way of permitting their residents to claim larger tax deductions than would otherwise be allowed because of the new $10,000 cap on the state and local tax deduction. The IRS will have a lot of issues to work through, and taxpayers will have a lot of questions. But with more funding, strong leadership, and a closer working relationship with Congress, I am convinced the IRS can do the job well.”