The Internal Revenue Service finds itself in an unusual financial situation. Persistent operational issues at the IRS, as well as contentious enforcement provisions in the recently passed Inflation Reduction Act, put the IRS under the microscope and in the crosshairs of America’s fractious politics. To avoid serious harm to tax administration and diminished trust in government, the agency will need to carry out its responsibilities under the legislation almost flawlessly.
I was in charge of the country’s tax system. A fair and efficient IRS, in my opinion, is critical to our democracy. I also support additional funding for the service, albeit at much lower levels than those already provided.
In the new law, the balance between enforcement and service is skewed. Enforcement receives 14 times the funding. Treasury Secretary Janet Yellen has correctly directed the IRS to prioritise restoring taxpayer services and eliminating the IRS’s ruinous backlogs of unprocessed returns. Efforts to reduce backlogs continue to be insufficient. Under its union agreement, service management has the authority to assign work and should immediately deploy additional teams of operational personnel to processing centres on rotating two-to-three-week details, foregoing other duties to work returns and answer correspondence. Only then will the volume of phone calls be manageable.
I would advise the secretary to include a comprehensive data security report among the IRS’s short-term deliverables. It will be twenty months since the ProPublica breach when the implementation plan she has requested is due in February. The details of thousands of Americans’ confidential tax documents were published by the news organisation. It would be irresponsible to spend any of the billions provided for improving systems housing taxpayer data before the IRS explains what caused the disastrous leak and how the government will prevent similar future events. The recent disclosure of another significant data problem emphasises the importance of this issue.
The IRS should not be experimenting with untested organisational structures at this time. The service should establish a small office for implementation planning, coordination, and monitoring, but leave line reporting in place at existing programme and support units so that they own the build rather than compete with it. The four existing business-operating divisions should be maintained. They are the appropriate venue for resolving tensions between taxpayer services and enforcement for key constituencies, which will be an ongoing issue given the skewed resources. The current two-deputy structure is up to the task, with one building infrastructure and the other driving programme performance.
The tax system is made up of three parts: the government, the taxpayers, and the practitioners. Government relations with practitioners have been strained, with the IRS ignoring outside advice. The service’s refusal to extend first-quarter 2021 estimated payments when it delayed the April 15 annual filing deadline was a flashpoint. Even as practitioners and the taxpayer advocate have expressed concern about the impact of dysfunction and inaction on small businesses and individual taxpayers, the IRS has stiff-armed them. The government must reconsider its approach to dealing with practitioners, who play an important role in ensuring taxpayers follow the law.
Americans expect the IRS, like the FBI and CIA, to be nonpartisan. The IRS has enjoyed relative independence over the years. This dynamic is shifting. The Trump administration delegated oversight of tax regulations to the White House, reversing a practise that had been in place since the Reagan administration, which had kept the process within the Treasury. For nearly a year, the acting commissioner was a senior Treasury political appointee rather than a career agency official. These arrangements did not cause any substantive problems, but they did pave the way for further integration of tax administration with policy and politics.
The Treasury department most closely associated with the tax compliance initiative (described by some as overseeing the IRS) during this administration has been the Office of Economic Policy. The new legislation allocates $50 million to departmental offices for “oversight” of IRS actions related to the new law’s implementation. The Biden Treasury must be cautious and should keep a safe distance from the IRS. As I suspect it is already discovering, the closer an administration gets to the agency, the more problems it attracts.