With the IRS Overwhelmed, Congress Looks for a Fix

With the IRS Overwhelmed, Congress Looks for a Fix

By Yuval Rosenberg and Michael Rainey
Friday, January 28, 2022
Happy Friday! The IRS and a host of partner organizations also want you to know that today is the 16th annual Earned Income Tax Credit Awareness Day, an effort to ensure that everyone who qualifies for the credit gets it. So if you’re waiting for the bomb cyclone about to hit the Northeast or just have a few minutes to spare this weekend might as well check.

Covid Aid Watchdog Warns It's Running Out of Money

A federal watchdog overseeing billions of dollars in pandemic aid says that his office is running out of operating funds and could be forced to start winding down some investigations in March and close its doors as soon as July.

In a series of letters this week, Brian D. Miller, the Special Inspector General for Pandemic Recovery, told lawmakers that his office faces a “terminal budget crisis” unless Congress provides more funding soon.

“The covid-19 pandemic is not over, and Congress’s unprecedented investment in the American economy has been prey to unprecedented levels of crime and fraud,” Miller wrote in a letter obtained by The Washington Post. “Without such funding, for the first time in history, an inspector general office will close prematurely for want of funding.”

Congress created SIGPR with $25 million in funding as part of the first pandemic relief package, the $2.2 trillion CARES Act signed into law by President Donald Trump in 2020. Trump appointed Miller to the office, which has a five-year mandate to oversee a group of pandemic relief programs (though which programs exactly has been a matter of some dispute).

One effort SIGPR oversees is the Main Street Lending Program operated by the Federal Reserve, which made $600 billion in loan facilities available to employers struggling during the pandemic. SIGPR is currently monitoring more than $22 billion in outstanding loans and assistance provided by the program and has opened more than two dozen cases to investigate possible fraud.

The bottom line: Congress and its various watchdogs have their hands full overseeing more than $5 trillion in spending authorized in response to the Covid-19 pandemic. But lawmakers have been unable to pass a spending package for 2022, jeopardizing new funding for SIGPR, which could be forced to close its doors if Congress fails to act.

With the IRS Overwhelmed, Congress Looks for a Fix

The Internal Revenue Service has warned repeatedly that this year’s tax season, which kicked off on Monday, will be particularly challenging and frustrating. As concerns mount about the difficulties the agency and the public will face, a bipartisan group of more than 200 House and Senate members this week called on the IRS to cut taxpayers some slack. And some Democrats are reportedly considering providing the agency with extra funding to improve service as part of the annual spending bill now being negotiated.

The IRS backlog: At the end of 2021, the IRS had 6 million unprocessed individual returns and some 2.3 million amended individual tax returns. The agency also has more than 1 million unprocessed Form 941 employer quarterly tax returns, many of which must be processed before it can get to nearly 500,000 amended Form 941 returns. As of mid-December, the agency also had some 4.75 million pieces of paper correspondence that had not been processed.

A funding boost in the 2022 spending bill? Democrats are looking to provide the IRS with an additional $80 billion over 10 years as part of a plan to improve the agency’s service and beef up collection of unpaid taxes. But that proposal is part of the stalled Build Back Better package. “That leaves delayed fiscal 2022 appropriations as likely the fastest and surest way to infuse the department with more cash as lawmakers work across the aisle toward an omnibus spending bill,” Roll Call’s Laura Weiss reports.

Sen. Chris Van Hollen (D-MD), who heads the Senate Appropriations subcommittee responsible for the IRS budget, told Roll Call that his panel is considering increasing the $13.6 billion in funding Democrats had proposed, which represented a 14% increase over 2021 funding. “I would like to see taxpayer services get a bigger boost because of exactly the kind of backlog we’re in,” Van Hollen said.

Both National Taxpayer Advocate Erin M. Collins and Center for Taxpayer Rights Executive Director Nina Olson, who served as taxpayer advocate for two decades, both recommend increasing the IRS budget as a key part of reforms to improve the agency — with increased oversight and clear planning also necessary. “I don’t want them to be finally given some money and then blow it, you know, because they don’t have a good plan,” Olson told Roll Call. “Because then they will never get the money again.”

But Weiss reports that Republicans may not agree to increased funding, noting that four key GOP lawmakers wrote to IRS Commissioner Chuck Rettig earlier this month asking what the agency what doing to address a processing backlog and customer service failures. “This crisis is not due to a lack of funding,” the Republicans wrote, asking why more than $1.4 billion in remaining supplemental funding provided as part of the federal pandemic response hadn’t been spent to address the problems.

Some short-term relief? Whatever funding boost lawmakers might provide probably won’t arrive in time to help resolve the issues the agency faces this tax season. But hundreds of lawmakers from both parties still say the agency can still provide taxpayers with some immediate relief by suspending automated collections and excusing some tax penalties, among other steps.

“Recognizing the extraordinary challenges of the COVID-19 pandemic, in addition to the IRS operating with antiquated technology and a constrained budget, we find the current situation alarming,” the group of more than 200 lawmakers, led by Sens. Bob Menendez (D-NJ) and Bill Cassidy (R-LA) along with Rep. Linda Sanchez (D-CA), said in a Wednesday letter to Treasury Secretary Janet Yellen.

The lawmakers added that they “stand ready to support the IRS and look forward to hearing how we can help you address any obstacles facing the agency.”

An IRS response: In an announcement Thursday, the overwhelmed agency said it was suspending certain automated notices as part of a larger effort to minimize taxpayer aggravation.

“The IRS entered this historic pandemic without the funding that it needs to serve the American people,” the announcement said. “As part of our ongoing efforts during the pandemic, and within these limited resources, the IRS has aggressively pursued every available option to better serve taxpayers this filing season. This includes, where appropriate and possible, requiring overtime by IRS employees, the redeployment of employees between functions, transfer of inventories among posts of duty, deployment of experienced surge teams – all aimed at returning our processing and correspondence inventories to a healthy level and improving our overall services to taxpayers and tax professionals.”

The halted notices would normally be sent in cases where the agency has credited taxpayers for payments but have no record of an income tax return having been filed. “In many situations, the tax return may be part of our current paper tax inventory and simply hasn't been processed,” the agency said. “Stopping these letters — which could have otherwise been sent to thousands of taxpayers — will help avoid confusion.”

The agency added, though, that it is required to send many notices within a certain time for them to be legally valid, unless Congress says otherwise.

Taxpayer and accountant groups said the IRS actions were welcome but called on the agency to do more. “There is a sense of despair right now,” Melanie Lauridsen, senior manager for tax policy and advocacy with the American Institute of Certified Public Accountants, told The Washington Post. “People are getting these notices and they can’t even get in touch with the IRS. So what do they do?”

Number of the Day: 4%

The cost of wages and benefits rose 4% in 2021, the Labor Department announced Friday. However, the increase, the largest in two decades, was more than matched by rising prices. “Overall wage growth, on a nominal basis, is still pretty strong,” Omair Sharif of Inflation Insights told The New York Times. “The downside is that inflation is eating away at all of these nominal gains.”

Some economists are worried that the strong wage growth indicates that inflation is becoming more firmly entrenched. “Inflation has fundamentally picked up and I think it’s fair to say that price gains are feeding back into wage gains as well,” said Ben Herzon of IHS Markit.

The increase in compensation eased at the end of the year, however, suggesting to some that wage inflation is less of a concern. “While elevated, wage pressures eased in final quarter of 2021 and pace observed mid year clearly not sustainable,” said Joseph Brusuelas, chief economist at the consulting firm RSM. “Wage price spiral that some feared, and was a factor on Fed policy pivot, not at hand.”

Have a great weekend! Send your feedback to yrosenberg@thefiscaltimes.com. Follow us on Twitter: @yuvalrosenberg, @mdrainey and @TheFiscalTimes. And please tell your friends they can sign up here for their own copy of this newsletter.


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