POLITICO Pro Q&A: Deputy Treasury Secretary Wally Adeyemo

Tax filing season is fast approaching, and the Treasury Department has warned Americans to brace for challenges as the IRS struggles to cope with existing backlogs and operational problems exacerbated by the pandemic.

Americans can start filing their 2021 tax returns on Monday. Returns are due April 18 for most individual filers, a few days after the normal April 15 deadline due to a holiday in Washington, D.C. This year’s start and end dates, announced by the IRS earlier this month, are more in line with historical norms, which have been upended since 2020 because of the pandemic.

Deputy Treasury Secretary Wally Adeyemo spoke with POLITICO this week about how the IRS is trying to get ahead of the fray and why more funding would help clear existing backlogs.

The transcript has been edited for clarity and length.

As of Dec. 23, the IRS still had about 6 million unprocessed individual returns. What sort of progress has been made since then, and what is the administration doing to get the backlog cleared?

The president has been focused on this since the very beginning. That's why in his budget, he asked for a 15 percent increase in IRS funding. And we've proposed Build Back Better because the challenges the IRS faces today, as we go into a challenging filing season, were created by the fact that the IRS has been chronically underfunded for more than 10 years.

The IRS is focused on making sure that we don't grow the backlog. And some of the things they've done, for example, is sending letters out to people who received stimulus checks, and advanced [Child Tax Credit payments], so they know which numbers to enter into their forms, so their forms aren’t rejected by the system.

We've been advocating to people that they go out and they file their taxes online. When you file your taxes online, on average, you'll get a refund in 21 days, if you're eligible.

At the same time, the Commissioner and the IRS are taking steps to make sure they deal with the inventory that exists today to bring it down toward historical levels.

So it sounds like the focus is more on keeping up with incoming right now, rather than trying to tackle the backlog.

We're trying to do both. The IRS is focused on dealing with returns that they've received throughout the last year, including those that they received in October.

But the key is that this could become a vicious cycle. When the IRS has been historically underfunded and you have too few people, the more returns you get in, the more backlog it creates.

What's making the process so much more challenging this year?

I think it's not just this year, it’s been since the pandemic frankly. When the pandemic hit, the prior administration — due to the public health concerns — stopped processing returns because they sent everybody home. People weren't in the facilities to open up mail. And then what happened was that they started to build up a backlog, that they worked through in large numbers.

In addition to the fact that you shut down for several months, all of a sudden you also had a number of tax law changes. For example, you had stimulus checks that went out. And now you had people who had to figure out how they're going to calculate those stimulus returns. So that meant that you'd have more errors potentially in the system that would create even more inventory.

And while you're doing this, you also have the challenge that IRS employees are getting sick from the same virus. Over the course of the last several years, 20 percent of the people who work on processing have been out for some health-related reasons.

Historically in a normal year, you get about 35 million calls for the IRS. Last year they got, during filing season alone, about 119 million calls. The volumes have increased dramatically in terms of the work, but the workforce has remained the same.

What does this mean in practical terms for taxpayers and what's the worst case scenario here?

Because of the underfunding of the IRS, we’re in a position where it's going to be a difficult filing season. And that's why we're taking steps to provide them with resources to make it as easy as possible.

We also are putting up new tools like the childtaxcredit.gov tool that will help people who receive the Child Tax Credit. Finally, for those people who need the help, we're recommending that they go to things like the VITA [Volunteer Income Tax Assistance] center.

The thing we want the American people to know is that this is going to be a challenging filing season, for a number of reasons that were created years ago. But there are tools that can help you get through this filing season and we want to make sure that people use them.

Have there been any discussions about delaying the filing deadline to give the agency some more time to work through this?

No, our goal right now is to take every step we can to make sure that people have the time to file.

As you know, for most people who are eligible for the second half of the Child Tax Credit, for the EITC [Earned Income Tax Credit], it's critical that they get that money as soon as possible, because it will help smooth out their income.

Our goal was to open filing season as early as possible, and that's what we've done this year.

On Wednesday, the President talked about the need to probably break up the Build Back Better plan into smaller pieces. Will the $80 billion in proposed IRS funding — which is also an important revenue offset for the package – be included in whatever measure the White House pushes this year?

I spent a great deal of time talking to members about the IRS. And every member I talked to talks about the fact that we need to have this package, because you're right, it is a pay-for, but also because they know that enforcing our tax laws are important.

The enforcement provisions are important in order to make sure that those who have skirted those tax laws in the past, especially those who are more wealthy, pay their fair share. There's money in there for service provision, because that's critical to building a culture of compliance. And then finally, the technology portion will also be critical to making sure the IRS is in a better position to serve the American people and also enforce our tax laws going forward.

So our expectation is that this will be a part of the conversation about what gets done as part of the packages that happen this year.

Republicans have argued that the IRS hasn't done well with the funding received, so why should it get so much more? They've also criticized the proposed budget increase for tilting more toward enforcement than taxpayer services. What's your answer to that, and is Treasury looking at altering how it would distribute a funding increase?

The truth is that for more than a decade, members of Congress, especially Republicans, have taken steps to underfund the IRS and today the IRS has as many employees working on these issues as it had in 1970. And our population has grown by 60 percent in this country.

That means the American people who need to call the IRS have less access to those services. We're less able to make sure that things like the EITC and the Child Tax Credit get to Americans who need them. And it also means that people who are attempting to skirt paying their taxes, especially the wealthy who have tons of lawyers, have been able to do so because the IRS is under-resourced. That's why we need the money that is part of the Build Back Better package.

Fundamentally, the package is designed in a way that all of this is reinforcing. The enforcement money, the service money and the technology money are all part of improving the system in order to improve enforcement, but also to improve services.

We don't think there's a need, based on what we know today, to adjust that, because we designed this package based on what we saw coming into government after the Trump administration, where service levels had fallen to all-time lows. We recognize that there is a need to improve that. That's why the President asked for an increase in the budget.

But we also knew there was a need for more long-term funding for the IRS, so that it wasn't in this position where on a regular basis, on an annual basis, it had to make decisions about how it invested. You don't want to have trade-offs for technology versus people; you want to be able to invest in both.

I understand an argument about the tax rates in the country. I don't understand an argument where people are arguing over whether people should pay the taxes that they owe. And fundamentally, the $80 billion is about making sure that we're in a position where those people who owe taxes pay them, in order to pay for things like our military and our infrastructure and for child care.

And finally, on the global tax deal that Treasury helped secure last year, does the administration have a plan B for implementing the deal? The plan to comply with the global minimum tax (Pillar Two) is stuck in Build Back Better, and the provisions regarding the taxing rights (Pillar One) may need a treaty, which seems like it will be hard to get through the Senate — what’s the plan right now?

The reality is that in my conversations with members, every Democrat I talked to is very interested in making sure that we have legislation that levels the playing field for American small businesses and for corporations around the world.

Our expectation is that as we deal with parts of the Build Back Better agenda, this will be a part of that conversation.

When we entered into this agreement with more than 130-something countries that covered 90-something percent of the global economy, we didn't have to bring it into force until 2022. We're at 2022 now. We're working to do that. Our expectation is that this will get done, and will be a historic agreement that puts us in a position to help level the playing field.

And as the conversations go on, on Pillar One, we also expect to find a path for getting that done. But right now, we're focused on making sure that we get the provisions that need to be done in 2022 done in order to bring this agreement into effect.