How the New IRS Boss ShouldHandle the $80 Billion Infusion
Written by: Dan Pilla
May 3, 2023 6:30 AM
Commissioner Werfel would do well to remember that helping people comply is more effective than harsh enforcement.
By a vote of 54-42, Danny Werfel was confirmed on March 9 by the U.S. Senate as the next commissioner of the Internal Revenue Service (IRS). Six Republican senators voted with Democrats to confirm Werfel. But be careful what you wish for. Commissioner Werfel faces unprecedented challenges right out of the gate as the nation’s chief tax collector.
Not least of these challenges is managing the agency through the backlog of millions of tax submissions that started building up in 2020 as a result of the Covid-related shutdown orders.
While the IRS is making progress on the backlog, in early January 2023 the National Taxpayer Advocate (NTA) reported that the agency had not yet processed about 400,000 original individual tax returns, 1 million original business tax returns, and 1.5 million amended tax returns. In addition, there were 5.9 million “suspended” returns awaiting further processing. A return is suspended during processing if errors are found that must be corrected through taxpayer-interaction before the IRS can proceed.
Another problem Werfel must address is the lengthy delays associated with identify-theft cases. The IRS deals with ID-theft cases that both directly and indirectly relate to tax returns. A directly related case occurs when a taxpayer’s refund was either frozen by the IRS or stolen through some kind of ID-theft scam. Both situations usually involve the filing of a false tax return using the victim’s Social Security Number. An indirectly related case arises when the ID theft involves bank or credit card fraud. In either case, the victim submits an Identity Theft Affidavit (IRS Form 14039) to start the process of resolving the situation. The NTA declares that there are currently 2.9 million ID-theft cases in the IRS’s inventory, and that individual cases are taking 360 days to resolve. This year-long delay is egregious considering one’s tax refund has been frozen during this process, if not outright stolen by fraudsters.
With so many suspended returns and unresolved cases, Werfel will also need to confront the IRS’s long-standing problems with its toll-free telephone-assistance lines. Tens of millions of people annually call the IRS for help with everything from tax-return preparation and assistance to delinquent tax payments. In 2022, the IRS received 173 million telephone calls, but only 13 percent of callers (22 million) actually got their calls answered. And while the accuracy of the advice the IRS gives to taxpayers regarding the preparation of tax returns is questionable, that’s an entirely moot point if the vast majority of callers can’t get any advice at all. Tax professionals, who have separate access to the IRS through the Practitioner Priority Service (PPS), didn’t fare much better. According to the NTA, last year only 16 percent of tax pros’ calls to PPS were answered by the IRS, an “all time low” for the agency.
The annual blizzard of correspondence the agency receives from taxpayers represents yet another challenge Werfel’s IRS must work through. The IRS mails out tens of millions of notices each year. These include (among other things) math error notices that propose an adjustment to one’s return, under-reporter notices, correspondence audit notices, and collection notices. That latter category also includes Collection Due Process (CDP) Lien and Levy notices. All such notices require a response within a specific period of time in order to avoid adverse IRS action. For example, a CDP levy notice requires a response within 30 days in order to avoid enforced collection, such as a levy on one’s paycheck or bank account. Despite these high stakes, the NTA reports that in 2022 it took the IRS an average of 193 days to process responses. Given the agency’s automated-collection function, that means that a taxpayer who responded on time to a notice may nevertheless face levy action simply because the agency didn’t process his response in a timely manner.
But likely the biggest challenge for the new commissioner is how to allocate the $80 billion in supplemental appropriation which the agency is set to begin receiving over the next ten years. This works out to $8 billion annually, on top of the agency’s normal annual budget allotment of about $14.5 billion. When the money was granted by Congress last August, Treasury secretary Yellen directed the Commissioner of IRS (now Mr. Werfel) to produce an operational plan showing how the additional money is to be spent.
I have previously argued that the growing size, scope, and complexity of the tax code mandates that the IRS make taxpayer service, assistance, and education its top priority. But according to the Inflation Reduction Act, only $3.2 of the $80 billion is pointed at taxpayer services. Instead, the overwhelming majority — $71 billion — is earmarked for law-enforcement actions and general operations support, including enforcement. And while there seems to be much optimism that the IRS will hire tens of thousands of new employees to address the backlog issues discussed above, the fact is that vast majority of the new hires will merely replace retiring employees.
In my mind, Commissioner Werfel’s greatest challenge is how to bring the $80 billion in new revenue to bear on service, assistance and education for millions of taxpayers who desperately need it. Make no mistake: It is much more important to help people comply with the byzantine tax code on the front end, than to grind them into power on the back end if they don’t comply. The reason is that 98 percent of every dollar paid to the IRS is paid without the need of enforcement action. There is simply much more to gain by helping people to comply than there ever will be by focusing on enforcement.
Listen to Dan Pilla on the Prudent Money Radio Show on May 10th from 3:00 PM - 3:30 PM on FM Radio 91.3 KDKR