‘A Perfect Storm’: COVID Law Could Send IRS Rage Into Overdrive

·9 min read

With a stroke of his pen on Thursday, President Joe Biden ushered in a series of sweeping pandemic relief measures: checks of $1,400 or more to individuals and families, a new child tax credit hailed as a revolutionary anti-poverty measure, and a major tax break for millions of people who took unemployment benefits last year.

In an instant, however, the $1.9 trillion relief bill created a crushing amount of work for the government agency tasked with making its lofty programs a reality: the Internal Revenue Service.

The perennially overworked and widely loathed tax agency had already been struggling to achieve its main annual goal—processing income tax filings—even before the American Rescue Plan passed. As of Thursday, it is sending out tax refunds 32 percent slower than it did last year, according to the agency’s weekly tax seasons statistics report. In February, the IRS’s internal watchdog said that only one out of every 11 calls to the agency were even getting an answer.

Now, in the middle of tax-filing season, the IRS’ mission has ballooned thanks to the pandemic relief plan. First, it must send out another round of stimulus checks to a large share of the country’s population. Then, the agency has to work through the bill’s changes to unemployment insurance taxation: with Democrats making the first $10,000 in benefits tax-free, many recipients who already filed their taxes will want to access that benefit, and the IRS has to figure out how to facilitate that. On top of that, the agency is responsible for readying a sweeping expansion of the child tax credit, which will now come in the form of a $300 monthly payment per child, to help millions of families in the coming weeks and months.

Looming over all of this, of course, is the filing deadline on April 15. Some lawmakers have called for the IRS to extend the filing period as it did last year, but there’s no indication yet that will happen. The IRS did not immediately respond to a request for comment.

Among tax policy experts and lawmakers who closely watch the IRS, these mounting duties, and the tight deadline, are creating serious anxiety. “I would never say never when it comes to the IRS and its ability to implement new legislation, new challenges, but, boy—this is going to be difficult,” said Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center. “There will presumably be SNAFUs along the way.”

A lobbyist on tax issues put it to The Daily Beast another way: “It’s a perfect storm.”

Supporters of the relief plan are in the somewhat awkward position of defending the bill’s ambitious programs while acknowledging the strain those same programs are placing on the agency that is supposed to somehow make it all work.

“It’s quite predictable that we’re going to be challenged moving forward, implementing this bill that is desperately needed,” said Rep. Gerry Connolly (D-VA), who chairs a sub-panel of the House Oversight Committee with jurisdiction over the IRS. “We’re asking the IRS, which is a tax collection and auditing agency, to become a benefit payment agency as well. That’s a big change. That’s quite a mission creep.”

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Few are expecting that the IRS will totally crash and burn in the coming months or become unable to carry out its key duties. But the widely-held suspicion is that it will simply move more slowly and that the quality of service to taxpayers will decrease.

“What’s going to happen is that the IRS is good at doing whatever is the priority of the moment that has to be done, and then will therefore sacrifice something else,” said Charles Rossotti, a former IRS commissioner under Presidents Bill Clinton and George W. Bush.

What may go on the backburner, necessarily, are other important but less-urgent functions of the IRS, putting it on an even worse long-term footing. Experts are concerned that the agency will backslide in achieving its core mission of compliance—ensuring people who owe taxes pay them—than it was before. IRS Commissioner Charles Rettig told lawmakers in February that the agency did not collect some $570 billion in taxes that were owed in 2019. A study that same year from the National Bureau of Economic Research found the so-called “tax gap” could grow to $7.5 trillion over a decade.

Democrats blame Republican cuts to the IRS budget for this sorry state of affairs. “Republicans spent the last decade gutting the IRS, so the agency has struggled when it comes to enforcement and staffing,” said Sen. Ron Wyden (D-OR), the chairman of the Senate Finance Committee, which oversees the IRS.

When they took the House majority in 2010, tea party Republicans practically reveled in slashing the IRS budget, which they viewed as emblematic of wasteful government spending. The emergence of the Affordable Care Act—a program the IRS essentially enforced due to the centrality of the law’s tax penalty for not having health insurance—made it even more of a GOP target.

Over the course of the decade, the IRS budget was cut by 20 percent, said Holtzblatt, and its workforce has been slashed by nearly a quarter since 2010. Modernization efforts have lagged: The agency relies on technology systems that were introduced in the John F. Kennedy administration. Even before the pandemic, these factors contributed to refund delays; President Donald Trump, whose first budget request called for $250 billion cuts to the IRS, eventually relented, asking for more money for tax enforcement in 2019.

When the pandemic hit last year in the middle of tax filing season, the IRS had to process returns and refunds while figuring out how to issue the first round of stimulus checks—170 million of them—included in the CARES Act. That effort was largely successful, but there were delays: As of October, 12 million Americans still had not gotten their checks. And by December, the IRS still had 1 million tax returns to process from 2019, well after the extended July 15 filing deadline.

Outrage from Capitol Hill was so general that special hotlines that the IRS set up to deal with lawmaker complaints were totally overwhelmed, Rettig told Connolly’s committee in October.

“We had a phone line for Congress that got essentially overrun with the volume…. and then it was my bright idea to create an email box such that our folks could work it around the clock on emails received,” said Rettig. “We received, I think, over a hundred thousand emails from a house.gov or senate.gov [email account]. And so my bright idea really overran us as well. But it was an effort to try to get there.”

For Rep. Bill Pascrell (D-NJ), who chairs the House Ways and Means subcommittee that oversees the IRS, the agency’s situation is remarkably similar to that of another public institution suffering from structural issues exacerbated by the pandemic: the U.S. Postal Service. “It’s not like the IRS is running a fine-tuned machine here,” Pascrell told The Daily Beast. “The IRS reminds me of the Post Office and how it’s run.”

Now that they control the White House and both chambers of Congress, Democrats are optimistic they can do more to get the IRS out of the hole with increased funding. The final year of the Trump administration even saw improvements; the IRS fiscal year 2021 budget increased by $409 million from 2020, for a total funding allotment of nearly $12 billion.

In his statement to The Daily Beast, Wyden pointed out that the American Rescue Plan includes $2 billion to help the IRS implement various programs. “We can’t ask the IRS to do more and more and not provide adequate resources,” he said, adding, “the solution here is not one-time funding.”

“It’s much harder for the IRS to build the plane while flying it,” continued Wyden. “We need sustained funding over the long-term so the IRS can build and maintain these systems over the long-term.”

In the short term, experts are confident that the IRS will promptly issue the next round of stimulus payments, having had two opportunities already to improve the process.

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But the duty to help eligible taxpayers access a major tax break on their past unemployment benefits may be tricky. Many will have to amend tax returns they already filed, and the IRS will have to figure out how to help them to do it quickly and accurately. “I am hoping that since last Friday when this got announced, that the IRS and Treasury lawyers have been working nonstop on guidance to taxpayers on what to do,” said Holtzblatt. “It’s not any easier for the IRS if taxpayers are confused.”

Many tax experts, like Holtzblatt, say it’s highly unusual for the government to change tax laws retroactively so late in the filing season. Despite all the converging challenges and the promise of delays, it’s unclear if the IRS will extend the tax filing deadline, as they did last year. “It’s a no-brainer to me,” said Pascrell. “The passage of massive stimulus this week is a huge win for America, but part of the [IRS] responsibility, as well as the administration’s, is to follow up and understand the consequences of what we enacted.”

Rossotti, the former IRS commissioner, told The Daily Beast the IRS has taken the position that an extension is “not a good idea.”

“It does not simplify things to change the filing season,” he said. “Any taxpayer can get an extension... There is a whole system geared to a set of dates, it ripples through a lot of things.”

Whatever the path ahead, it will not be an easy one for the IRS. Rettig is set to testify in front of the House Ways and Means Committee next week, and Pascrell said he “better” have answers about how they plan to maintain adequate service to taxpayers.

His colleague, Connolly, was not quite ready to heap blame on Congress for the situation. But he offered a reflection: Legislative bodies like Congress, he said, “do not often pay attention to implementation and delivery. They believe when they passed the bill, they solved the problem.”

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