IRS plans to improve taxpayer service with budget increase

Internal Revenue Service Commissioner Charles Rettig pledged to do more to improve taxpayer service after Congress approved a $675 million funding increase.

“Taxpayer service remains the most significant IRS priority, and we have implemented many new, innovative strategies in an effort to improve our overall level of service and processing of our unprecedented current and projected inventories,” Rettig said in prepared testimony before a House Ways and Means Oversight Subcommittee meeting on Thursday. “The pandemic presented the IRS with a confluence of novel and critical demands on the same set of limited resources, with similar levels of urgency and priority. In response, although we may not have always gotten it right or supported the important priorities of some, our employees have worked extremely hard to respond as best we could to a never-ending string of compounding challenges.”

He noted that the 2022 filing season got off to a strong start in terms of tax return processing and the operation of the IRS’s technology systems. Through March 11, the IRS received more than 63 million individual federal tax returns and issued more than 45 million refunds totaling more than $151 billion, he noted. For this tax season, Rettig pointed out that refund returns continue to be processed on a priority basis ahead of returns with a balance due or full payment of the underlying liabilities.

However, the IRS is still catching up with a backlog of millions of tax returns from last year. “While the current filing season has so far presented no major disruptions or surprises, we know we have a great deal of work to do in many other areas of the IRS,” Rettig admitted. “The IRS continues to focus on working to reduce paper correspondence inventory and process paper tax returns from 2021 as well as improve our response to an unprecedented level of phone demand — situations that have been compounded by the pandemic and related issues.”

He noted that in fiscal year 2021, the IRS received more than 15 million individual paper returns. The agency had a significantly higher error rate on individual returns, mostly due to the inability of taxpayers to accurately reconcile their actual Economic Impact Payments and claims utilizing prior year income (2019 versus 2020) for the Earned Income Tax Credit.

“We received far more than 10 million returns where the taxpayer failed to properly reconcile the two EIPs received in 2020 to the amount of the Recovery Rebate Credit (RRC) stated on their return filed in 2021,” said Rettig. “Similarly, more than 10 million individuals reported unemployment compensation on their return that was subject to the exclusion enacted during the 2021 filing season. In addition, millions of taxpayers elected to use 2019 rather than 2020 as the base year for determining their EITC (and the legislative change for that was enacted after our IT development for the 2021 filing season had been completed). Each of these returns required a manual review and resolution by an IRS employee.”

While the $675 million funding boost approved by Congress last week should help the IRS deal with such matters, it was only about half the amount the House had approved last summer (see story).

“Although the IRS appreciates the $675 million increase to our budget in the FY 2022 Omnibus, funding constraints remain a barrier to addressing the current paper inventory and supporting our IT operations adequately,” said Rettig. “We are exploring all options to move funds to meet today’s immediate challenges but doing so is a short-term solution for a long-term structural funding problem that only Congress can help us address. For example, this year’s funding left our Operations Support account, the account that funds all of the hiring, rent, laptops and telecom for taxpayer services and enforcement employees, $100 million short of our inflationary cost increases. Otherwise, we are left depleting resources from one less-visible program to pay for another essential program, which causes us to slow or stop work on updates to our systems that must be modernized to provide digital services that citizens expect from us.”

Rettig asked Congress for more consistent levels of funding after the agency had to cope with a series of continuing resolutions while Congress bickered over the budget, essentially forcing the IRS to freeze its current level of funding. “Mandatory multiyear, consistent funding — the $80 billion proposal under consideration by you and your colleagues — would help us deliver meaningful services to taxpayers, conduct critical enforcement initiatives and support long-term modernization efforts to improve both service and compliance for the nation,” he said.

Lawmakers told Rettig about the complaints they have been hearing from their constituents about the difficulty they have in reaching the IRS to resolve their problems.

“We must assist our constituents who have been waiting months for much-needed refunds, including individuals claiming the rebate recovery credit and small businesses claiming the employee retention credits,” said Rep. Judy Chu, D-California, who chaired the hearing. “I recently held an event with our local taxpayer advocate, and it has been one of the highest-viewed events of the pandemic, which just goes to show how many people are looking for information and relief this filing season. And it’s not just credits and refunds.”

She cited one constituent who was denied an increase on his SBA Economic Injury Disaster Loan because the IRS hasn’t corrected his business return from 2019. It also took months to post his returns from 2020 and 2018 before Chu’s office intervened, and now his business is in danger of closing. Separately, the SBA announced Tuesday that it is extending the deferment period on all COVID EIDL loans to 30 months for all borrowers. The extension applies to loans issued in calendar years 2020, 2021 and 2022, some of which had an 18-month deferment period, while the remainder had a 24-month deferment period.

Lawmakers acknowledged that the IRS needs to upgrade its aging technology to cope with the increasing demands. “When it comes to a long-term vision of the IRS, we need to come together to fix the customer service problems at the IRS and modernize IRS technology so that the agency can operate effectively in the 21st century,” said Rep. Tom Rice, R-South Carolina, the ranking Republican on the subcommittee. “We can do it and I know there are members on both sides of the aisle dedicated to working together on those issues.”

The IRS recently announced plans to hire an additional 10,000 employees to help it deal with its backlog of millions of unprocessed tax returns over the coming year. Rettig said he expects to clear the backlog by the end of this year. However, he may have trouble reaching his hiring goal and he noted that the IRS only recently got Streamlined Critical Pay Authority to help with directly recruiting employees. The IRS still has relatively low starting pay compared to companies like Amazon and Walmart that have also announced aggressive hiring plans. Rettig's term as commissioner is set to end in November and he said this may be his last time testifying before the subcommittee.

Lawmakers also pressed Rettig on its audit rate for both corporate and individual taxpayers. Rettig admitted the IRS is often outmatched by the resources of large corporations (see story). “We do not have the resources to go after the bigs or the superbigs, as we refer to them, and we get outgunned routinely in that space,” he said.

In contrast, the IRS more routinely audits taxpayers claiming refundable tax credits, such as the Earned Income Tax Credit and the Child Tax Credit. Rettig was asked about a recent report from Syracuse University’s Transactional Records Access Clearinghouse that found the IRS audited low-income workers at a rate five times higher than everybody else (see story). Rettig strongly denied the findings, citing statistics from the IRS Data Book. “That report from Syracuse University is absolutely 100% false,” he said. “I’m tired of having to deal with this issue. We audit high-income taxpayers more than any other category in the Internal Revenue Service. Taxpayers reflecting over $10 million of income are audited at a rate exceeding 7%. Taxpayers at the $25,000 level, which is primarily the Earned Income taxpayer, would be the only people we would look at, are audited at 1.1%. Those are correspondence audits.”

He blamed requirements for tracking improper payment rates for research purposes contributing to the need to conduct those audits, but those statistics indicate a 25% improper payment rate for the Earned Income Tax Credit amounting to over $17 billion each year. “We are putting the most experienced agents on the most complex tax returns,” said Rettig.

Rettig was also asked about continuing requests by accounting and tax groups like the American Institute of CPAs for penalty relief for taxpayers and the suspension of automated tax notices (see story). “The point on the automated notices, those were stopped,” he said. “If somebody has received one recently, I would like to have that notice and find out because all of those automated notices stopped months ago, so we have addressed virtually everything,” he said. “Nothing is off the table for us to consider.”

He noted that he and other IRS officials regularly meet with the AICPA and other groups to hear their concerns, and he considers them friends, having worked as a tax attorney before joining the IRS. “The people that provide the letters and lobby you hard know the answers to the questions they have you ask me,” he said.