The IRS Taxpayer Advocate Service (TAS) recently documented the operational mess at the IRS:
- IRS telephone service is “the worst it has ever been,” with the IRS answering just 11 percent of incoming calls in FY 2021. [p. 3]
- The IRS mails tens of millions of notices each year, often requiring responses. It used to take the IRS about 45 days to turn around correspondence, but now the “processing time for some categories of correspondence has been running six months or longer.” [p. 3]
- The number of disputes the TAS handles between taxpayers and the IRS soared from 167,000 in 2017 to 264,000 in 2021. [p. 4]
- Mountains of unopened mail have piled up at IRS facilities leaving millions of taxpayers in financial limbo. The IRS ended the 2021 season with a backlog of more than 35 million returns, and today “millions of returns and amended returns still remain unprocessed.” [p. 20]
- Last year, “tens of millions of taxpayers were forced to wait extraordinarily long periods of time for the IRS to process their tax returns, issue their refunds, and address their correspondence,” and this year IRS service “could be as bad, and potentially worse.” [p. 33]
Why is this happening?
First, there are longstanding bureaucratic failings at the IRS, such as antiquated computer systems. The TAS reports, “The two IRS systems containing the official records of individual and business taxpayer accounts are the oldest major technology systems in the federal government. The IRS also has about 60 case management systems that generally are not interconnected; each function’s employees must transcribe or import information from other electronic systems and mail or fax it to other functions.” [p. 5]
Second, the pandemic prompted the IRS to close or understaff numerous facilities in 2020. Tax returns and taxpayer correspondence piled up and went unopened and unaddressed for months.
Third, the TAS reports that since FY 2010, the IRS’s inflation‐adjusted budget has fallen about 20 percent and staffing levels have fallen by nearly 17 percent. [p. 12] In my view, that may not have been a problem if the IRS had steadily increased its productivity as private businesses do. Average labor productivity increased 1.7 percent annually over the past two decades for businesses within “professional, scientific, and technical services: accounting, tax preparation, bookkeeping, and payroll.”
Fourth, and most important, Congress has been passing huge and complicated tax breaks and subsidies for the IRS to administer. Here are some of the changes for individuals for tax year 2021 passed in the March 2021 American Rescue Plan (ARP):
- Earned Income Tax Credit (EITC). The EITC is one of the most error‐ridden parts of the tax code, but rather than repealing it, Congress keeps expanding it. The ARP expanded EITC eligibility and benefit levels.
- Child Tax Credit (CTC). The ARP expanded eligibility and benefit levels for the CTC.
- Advance CTC. The ARP allowed for up to half of CTC benefits to be paid monthly to 36 million households, and the payments must be reconciled with annual benefit totals at tax filing time.
- Economic Impact Payments (EIPs). A total of 478 million of these “stimulus” payments have been made as refundable tax credits, including the third round of payments in the ARP. [p. 2] Qualified individuals can claim a Recovery Rebate Credit (RRC) on their tax returns if they did not receive the full amount of their EIP.
- Child and Dependent Care Credit. The ARP increased eligibility for this credit and raised the benefit levels for 2021.
For each such provision, the IRS must create or change tax forms and guides, program its computers, consider how changes interact with other provisions, communicate changes to the public, take steps to prevent abuse, and perform other tasks. Each law change can prompt millions of queries from confused taxpayers, which in turn consumes more IRS resources in response.
Indeed, the flood of recent tax changes has generated an avalanche of queries. The TAS reports that from FY2019 to FY2021 the number of phone calls to the IRS jumped from 99 million to 282 million, while the number of page views on IRS.gov soared from 3.4 billion to 11.5 billion. [p. 16] In the past year, the “volume of calls skyrocketed and overwhelmed the IRS. Many taxpayers are not getting answers to their questions and are frustrated.” [p. 21]
Huge piles of unanswered mail are adding to the confusion. Politico says that processing delays have “triggered automatic notices to taxpayers that they owe money and may be assessed additional taxes, even though in many cases they’d already replied to previous notices but those replies were sitting in mail piles.” The TAS says more trouble is on the way: “With tens of millions of individuals claiming Advance CTC and RRC for the third stimulus payment, we believe the IRS will again be faced with the daunting task of manually reviewing tens of millions of returns, thus causing more processing and refund delays for millions of taxpayers.” [p. 38]
The TAS pins part of the blame for all this on the IRS, and the public appears to agree. Just 73 percent of people “trust the IRS to fairly enforce the tax laws” and only 69 percent “trust the IRS to help them understand tax obligations.” [p. 20] However, I think Congress is more at fault because it has loaded up the tax code with so many handouts and narrow breaks. If we had a simpler tax code, individuals and businesses would save billions of hours in compliance time, and they would have greater trust that tax laws were being fairly enforced.
The TAS says that this year’s filing season looks “bleak.” [p. 45] The IRS Commissioner is promising an “all hands on deck” strategy for processing this year’s returns. But the IRS mess should be a wake‐up call for Congress to stop adding narrow breaks and handouts to the tax code.
It should also prompt the Biden administration to rethink its tax approach. With its Build Back Better legislation, the administration has pushed to add dozens of new and complicated tax breaks and tax hikes to the code. The administration should scrap that approach and turn its attention to tax‐code simplification.
Chris Edwards is the director of tax policy studies at Cato and editor of DownsizingGovernment.org.