The IRS Is in Crisis, Watchdog Report Warns

The IRS Is in Crisis, Watchdog Report Warns

By Yuval Rosenberg and Michael Rainey
Wednesday, January 12, 2022

Happy Wednesday! Or maybe not so happy for President Joe Biden, who took another gut punch today in the form of the latest reading on inflation. Here's what's happening.

Inflation Hits a Nearly 40-Year High

Consumer prices rose by 7% in 2021, the largest 12-month increase since 1982, the Labor Department announced Wednesday. On a monthly basis, the consumer price index (CPI) was up by 0.5% in December, easing a bit from the 0.8% recorded in November and 0.9% recorded in October.

Despite the relative slowing at the end of the year, many economists expect the elevated level of inflation to continue for a while. “The breadth of gains in recent months gives inflation inertia that will be difficult to break,” said Sarah House of Wells Fargo. “We expect the CPI to remain close to 7% the next few months.”

Increases in the price of goods was the main driver of inflation in 2021 — excluding volatile food and energy, the commodity price index jumped 10.7% last year, the largest increase since 1975 — but wages and housing costs are expected to account for a greater share of price increases in 2022. “Sure, there will be goods categories that cool off once supply bottlenecks begin to ease later this year, but at the same time, the pressure from wages to prices is only going to ramp up,” said Stephen Stanley, chief economist at Amherst Pierpont Securities, in a note to clients.

The threat to Democrats’ agenda: President Joe Biden said in a statement that the report shows that his administration is making progress in its efforts to combat inflation, and highlighted the strength of the U.S. recovery from the Covid-19 pandemic. “At the same time,” he added, “this report underscores that we still have more work to do, with price increases still too high and squeezing family budgets.”

Politically, the report could be a problem for Democrats, heightening concerns that inflation is getting out of hand — a worry that could weaken support for the president’s Build Back Better package. Sen. Joe Manchin (D-WV), who has criticized the bill for its potential to contribute to inflation despite assurances to the contrary from economists, called Wednesday’s report “very, very troubling.”

Progressives are lowering their expectation for the spending package, Bloomberg’s Jarrell Dillard and Erik Wasson report, and the inflation numbers only increase the likelihood that the Build Back Better bill will have to shrink in size and scope, perhaps significantly, if it’s going to win Manchin’s crucial support.

The IRS Is in Crisis, Watchdog Report Warns

Last year was the most challenging ever for taxpayers and tax professionals, the National Taxpayer Advocate says in an annual report to Congress issued Wednesday: “There is no way to sugarcoat the year 2021 in tax administration: From the perspective of tens of millions of taxpayers, it was horrendous.”

The report warns that the “IRS is in crisis” and that the “imbalance between the IRS’s workload and its resources has never been greater.” It reiterates a call for Congress to provide more funding for the agency. Since fiscal year 2010, it says, the IRS budget has been cut by about 20% in inflation-adjusted terms, and its workforce has shrunk by 17%, while its workload as measured by the number of individual returns has grown by 19%. “Largely as a result of these budget reductions, the IRS cannot provide top quality service or enforce the law with fairness to all,” the report says. “Additional funding for the IRS would not only improve taxpayer service but would almost surely increase revenue collection.”

The resource constraints combined with the added challenges presented by the pandemic, including several relief programs Congress tasked the IRS with administering, all resulted in a terrible year for taxpayers. Tens of millions of taxpayers saw extraordinary delays in the processing of their returns and refunds last year, the report says — holdups that caused financial hardship for some filers and “extreme frustration” for many others. Those delays were accompanied by difficulty reaching the IRS and having correspondence processed. Telephone service was the worst it has ever been, the report says, and taxpayers had problems getting information on the agency’s “Where’s My Refund?” tool and getting help from the Taxpayer Advocate’s office. The report says Americans visited the Where’s My Refund tool more than 632 million times last year, up from about 370 million times in 2019.

The report credits the agency and its leadership for performing well given the circumstances. It says the IRS last year issued 130 million tax refunds totaling $365 billion, sent 478 million stimulus payments totaling $812 billion and delivered some 36 million families more than $93 billion in monthly child tax credit payments.

Yet as challenging as last year was, Taxpayer Advocate Erin M. Collins warns that this year could be just as bad or worse for some taxpayers, given that many filers will have to reconcile the monthly child tax credit payments they received in 2021 and some will also be claiming credit for stimulus payments they did not receive — all while the IRS is already carrying over millions of unprocessed returns and millions more pieces of correspondence.

“While my report focuses primarily on the problems of 2021, I am deeply concerned about the upcoming filing season”, Collins said in a statement, adding that “paper is the IRS’s kryptonite, and the agency is still buried in it.”

Read the Taxpayer Advocate’s report here or see more about it here.

Treasury Reports Smallest Monthly Deficit Since 2019

The federal budget deficit was $21.3 billion in December, the U.S. Treasury reported Wednesday, the smallest monthly shortfall since the Covid-19 crisis began nearly two years ago.

The narrower deficit was produced by a combination of higher tax receipts generated by a recovering economy and lower spending on relief and stimulus programs. Receipts rose sharply in December compared to a year earlier, up 41% to $487 billion, while outlays increased a more modest 4% to $508 billion.

The deficit so far for the current fiscal year, which began in October, totals $348 billion, about 30% smaller than at the same point a year ago.

The White House projects a deficit of $1.6 trillion in the 2022 fiscal year. That would be a historically high budget gap, but down sharply from the $2.7 trillion recorded in 2021 and $3.1 trillion in 2020.

Medicare Proposes to Restrict Coverage of Controversial and Costly New Alzheimer's Drug

Medicare officials on Tuesday proposed limiting coverage of a controversial and expensive new Alzheimer’s drug to patients in approved clinical trials. The proposal could sharply limit the number of patients who use Biogen’s Aduhelm, a monoclonal antibody treatment for Alzheimer’s, which has faced questions about both its cost and its effectiveness. The decision also applies to similar drugs in development.

The preliminary proposal by the Centers for Medicare and Medicaid Services (CMS) is highly unusual. “CMS almost never demands such trials for a drug already approved by the Food and Drug Administration,” The Washington Post’s Laurie McGinley and Amy Goldstein note.

Dr. Lee Fleisher, the chief medical officer and director of the Center for Clinical Standards and Quality at CMS, said in a statement that the proposal “is the result of robust evidence analysis conducted through a thorough review process that found while there may be the potential for promise with this treatment, there is also the potential for harm to patients.”

How we got here: Aduhelm last year became the first new Alzheimer's disease treatment approved by the Food and Drug Administration in nearly 20 years. But the approval sparked controversy given lingering questions about whether the drug works — and fears that the drug could devastate Medicare’s finances given the prevalence of Alzheimer’s and Biogen’s original price for the drug, $56,000 a year.

Medicare in November announced a record premium increase in dollar terms, based partly on the potential cost of covering Aduhelm. But after the drug saw dismal early sales, Biogen last month said it would cut Aduhelm’s cost in half, to $28,200 a year. CEO Michel Vounatsos said Monday that the company’s initial pricing was “wrong.” Health and Human Services Secretary Xavier Becerra on Monday said he is instructing CMS to reassess the Medicare premium increase based on the drug’s new pricing. “With the 50% price drop of Aduhelm on Jan. 1, there is a compelling basis for CMS to reexamine the previous recommendation,” Becerra said.

The controversy will continue: The CMS coverage decision upset Biogen, some patients and patient advocates, who had high hopes for the drug. “With this proposal, CMS is writing off an entire class of medicines before multiple products have even been reviewed by FDA, positioning itself and not FDA as the key arbiter of clinical evidence,” Nicole S. Longo, a spokesperson for PhRMA, the drug industry trade group, said in a statement. “Instead of erecting more barriers, we encourage CMS to reconsider this ill-advised decision and work to address the significant and urgent needs facing patients with Alzheimer’s disease.”

But critics of the drug lauded the decision. “Biogen’s outrageous original price for Aduhelm, $56,000 per year, is the poster child for how dysfunctional our drug pricing system has become and it is the perfect example of why Medicare should be negotiating drug prices with the pharmaceutical industry,” Sen. Bernie Sanders (I-VT) said in a statement.

The CMS proposal will be open to public comment for 30 days, with a final decision due in April.

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