October 2021: Starting Thoughts

Journal of Financial Planning: October 2021


Taxing Times

The Internal Revenue Service, not the most popular government agency in the best of times, has been struggling with a backlog of 35 million tax returns as of July. Taxpayers are still waiting for refunds, and legislation passed in 2020 to ease some of the economic burden on taxpayers and businesses made already complex tax rules even more confusing.

Just like every other business during the pandemic, the agency had to deal with staffing shortages and location closures. But the IRS is not a business, and its challenges didn’t start with the pandemic.

In her 2020 annual report to Congress, Erin Collins, the National Taxpayer Advocate, identified 10 of the most serious problems taxpayers faced during the 2020 tax filing season. Almost all of them were related to outdated technology and communications operations. Clients and tax professionals who are trying to meet their obligations are being stymied by the agency’s own infrastructure. Collins noted in her report that IRS employees answered less than 24 percent of the phone calls they received. Even using tools ostensibly designed to relieve some of the pressure created new headaches. During tax filing season last year, the IRS mailed nearly 19 million automatically generated late notices with response dates that had passed (sometimes by months). The same problem happened again in November 2020.

2019’s Taxpayer First Act called for improved service and modernized systems, including customer service elements that taxpayers have come to expect from private businesses, like customer callback systems, online accounts, and digital service tools. Collins said that modernizing the IRS’s business system will cost as much as $2.7 billion in additional funding over the next six years, while its Business Systems Modernization account was funded at just $223 million in fiscal year 2021.

The IRS is an easy punching bag, but Collins argues that despite the significant challenges, the agency performed well last year.

“Let’s be clear: The IRS is the accounts receivable department of the federal government,” she said in the report to Congress. “In FY 2020, it collected about $3.5 trillion on a budget of about $11.51 billion, producing a remarkable return on investment (ROI) of more than 300:1. For this reason, it is economically irrational to underfund the IRS.” 

Danielle Andrus