Written Testimony of Charles P. Rettig, Commissioner, Internal Revenue Service, on the Filing Season and the IRS Budget (May 3, 2022)
Summary
Charles P. Rettig, Commissioner of the Internal Revenue Service, submitted this written testimony to the Senate Appropriations Subcommittee on Financial Services and General Government for its May 3, 2022 hearing on the filing season and the IRS budget. Rettig reports that through April 15 the IRS processed more than 118 million individual federal tax returns and issued more than 78 million refunds totaling more than $242 billion. Rettig says backlogs were compounded by the pandemic and related issues, and cites more than 15 million individual paper returns in FY 2021 and far more than 10 million returns that did not properly reconcile Economic Impact Payments with the Recovery Rebate Credit. The President’s FY 2023 Budget proposal provides $14.1 billion for the IRS, an increase of $2.2 billion, or 18 percent, over the FY 2022 annualized continuing resolution level of $11.9 billion.
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WRITTEN TESTIMONY OF
CHARLES P. RETTIG
COMMISSIONER
INTERNAL REVENUE SERVICE
BEFORE THE
SENATE APPROPRIATIONS COMMITTEE
SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
ON THE FILING SEASON AND THE IRS BUDGET
MAY 3, 2022
INTRODUCTION
Chairman Van Hollen, Ranking Member Hyde-Smith and Members of the
Subcommittee, thank you for the opportunity to discuss the filing season and the
IRS budget.
Taxpayer service remains the most significant IRS priority, and we have
implemented many new, innovative strategies in an effort to improve our overall
level of service and processing of our unprecedented current and projected
inventories. The pandemic presented the IRS with a confluence of novel and
critical demands at a time when we lacked the stable, long-term funding needed
to appropriately serve the American people. Given these significant challenges,
although we may not have always gotten it right or supported the important
priorities of some, our employees have worked extremely hard to respond as best
we could to a never-ending string of compounding challenges.
I am pleased to report the 2022 filing season has gone well in terms of tax return
processing and the operation of our information technology (IT) systems. Through
April 15, the IRS processed more than 118 million individual federal tax returns
and issued more than 78 million refunds totaling more than $242 billion. We
worked diligently to open the filing season earlier this year than last, on January
24, 2022, compared to February 12, 2021. A detailed discussion of the filing
season is provided later in this testimony.
While the filing season has presented no major disruptions or surprises, we know
we have a great deal of work to do in many other areas of the IRS. The IRS
continues to focus on working to reduce paper correspondence inventory and
process paper tax returns from 2021 as well as improve our response to an
unprecedented level of phone demand – situations that have been compounded
by the pandemic and related issues. For example, in FY 2021, we received more
than 15 million individual paper returns. We also had a significantly higher error
rate on individual returns due in large part to challenges associated with reconciling
funds received through important stimulus programs like Economic Impact
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Payments (EIPs). We received far more than 10 million returns where the taxpayer
did not properly reconcile the two EIPs received in 2020 to the amount of the
Recovery Rebate Credit (RRC) stated on their return filed in 2021. Similarly, more
than 10 million individuals reported unemployment compensation on their return
that was subject to the exclusion enacted during the 2021 filing season. In addition,
millions of taxpayers elected to use 2019 rather than 2020 as the base year for
determining their EITC (and the legislative change for that was enacted after our
IT development for the 2021 filing season had been completed). Each of these
returns required a manual review and resolution by an IRS employee.
We will continue to do our best as we face new challenges. Our workforce is strong
and remains our most important resource, with substantially all of our employees
engaged on a full-time basis. We have taken numerous steps to address these
challenges, and we continue to look for other ways so that we can improve these
operations and get healthy by the end of the year.
The IRS is serving more people and entities in a global environment than ever
before, while handling new and bigger responsibilities. This was the case before
the pandemic and has only increased since then. At the same time, we have
experienced delays in updating our IT systems, which means the IRS and
taxpayers must continue to use certain paper-based processes. This use of paper
processes can result in significant delays, contributing to IRS inventories and
limiting taxpayers’ ability to know the status of their cases.
We are in this position because we have not had the sustained sufficient multi-year
investment for IT modernization necessary to improve our technology and
operating systems. I am here to tell you today that nothing is more important than
having those resources in place to make it possible for us to appropriately serve
the American people. Absent consistent, timely, multi-year funding we have largely
been a paper-based organization operating in a digital world environment. In 2022,
IRS employees should not be transcribing paper returns by hand. Taxpayers
should not have to wait and wait on the phone—often to no avail. I want to better
serve the American people—and so do the dedicated employees at the IRS. They
will finally be able to do so if you, and your colleagues, provide us the stable, multi-
year funding we need.
Like all federal agencies, the IRS is best able to accomplish our mission when we
receive the resources necessary to do so. And that mission is vital to the
functioning of our government: The fact that the IRS collects approximately $4.1
trillion in gross revenue per year, representing about 96 percent of the gross
revenue of the U.S., clearly shows that the success of our nation is closely tied to
the success of the IRS. The President’s FY 2023 Budget proposal, which provides
$14.1 billion for the IRS, will allow the agency to take important steps forward in
improving taxpayer service, modernizing our systems and ensuring fairness in the
tax system. But for the IRS to truly be able to deliver for the American people, it
needs stable, multi-year funding to be in place to allow the agency to rebuild.
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Over the course of the last decade, the IRS’s budget has decreased by more than
15 percent in real terms. Because of this decrease, in FY 2021 we realized less
than 79,000 full-time equivalents (FTEs), which is close to 1974 levels. Since 2010,
IRS Enforcement FTEs have decreased by 30 percent, while the nation’s real
Gross Domestic Product has increased by 29 percent, and the filing population
has increased by 14 percent. Over the next six years, we estimate we will need to
hire 52,000 employees just to maintain our current levels. Every measure that is
important to effective tax administration has suffered tremendously in recent years,
with profound deficiencies resulting from underinvestment in human capital and
information technology.
Although the IRS appreciates the $675 million increase to our budget in the FY
2022 Omnibus, sufficient funding remains a constraint to addressing the current
paper inventory and supporting our IT operations adequately. For example, this
year’s funding left our Operations Support account, the account that funds all of
the hiring, rent, laptops, and telecom for taxpayer services and enforcement
employees, $100 million short of our inflationary cost increases. Without shifting
the funds to the appropriate accounts, we are left depleting resources from one
less-visible program to pay for another essential program, which causes us to slow
or stop work on updates to our systems that must be modernized to provide digital
services that citizens expect from us. Mandatory multi-year, consistent funding
would help us deliver meaningful services to taxpayers, conduct critical
enforcement initiatives and support long-term modernization efforts to improve
both service and compliance for the nation.
When we are confronted with long-term Continuing Resolutions (CRs), we typically
freeze nearly all external hiring. We take this action to ensure we have funds to
pay all employees, including any applicable pay raises. Last fall, we increased
staffing despite the CR, hiring at risk without the funding in place to support these
positions, but assuming future resources would be provided by the eventual
enactment of the FY 2022 appropriation, to help address our inventory. The full
fiscal year 2022 President’s Budget request would have allowed us to maintain
current staffing levels and fund 4,200 additional full-time equivalent employees.
The Omnibus increased our Taxpayer Services account by $193 million from FY
2021, which covered the inflationary increases in Taxpayer Services (what we refer
to as “maintaining current levels”), and about 42 percent of our requested program
increases. We will now be required to use other funding sources to cover our
remaining needs, including requesting an inter-appropriation transfer, redirecting
user fees, and realigning American Rescue Plan (ARP) funds. Although the
Omnibus reflects an important down payment on the necessary investments in the
IRS, it is far, far from what the dedicated IRS employees need to serve the
American people they way they deserve.
Even with appropriate funding, the IRS continues to experience significant
challenges recruiting talent to support the critical work the agency does for
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taxpayers and our nation, particularly in the current labor market. With our limited
funding, we have been hard at work to do all we can to bring talent on board. For
example, we have major processing center operations in Austin, TX, Kansas City,
MO, and Ogden, UT, where we are working to attract eligible applicants for more
than 5,000 vacant positions. We have been holding both in-person and virtual job
fairs in Austin, TX, Kansas City, MO, and Ogden, UT where, using recently
received Direct Hiring Authority (DHA), we have been able to make more than
2,500 conditional offers at the conclusion of the interviews.
IRS employees want to do more to help taxpayers. We want to be able to answer
the phones and respond to questions. We want to be ready, whenever crisis hits,
to deliver economic relief quickly — as our employees demonstrated repeatedly
during the current pandemic, working long hours to deliver crucial programs.
During this challenging period, the IRS has been operating in an “all-hands-on
deck” approach, leaving nothing off the table for consideration to improve overall
service.
Our employees continue to expend every effort to balance the confluence of
multiple, unprecedented demands − including successfully starting the current
filing season and working our inventory of unprocessed tax returns, as well as
looking for additional ways to minimize burden for taxpayers, tax professionals
and businesses. We will continue to rapidly adapt to changing circumstances
when appropriate to do so. We remain committed to ensuring the tax system is
administered fairly and impartially and that every American receives the nature
and quality of services they deserve.
EFFECTS OF THE COVID-19 PANDEMIC AND THE IRS RESPONSE
This unprecedented pandemic illustrates the significant role that the IRS plays in
the overall health of our country. We have been called to provide economic relief
during this national crisis while also fulfilling our routine responsibilities of tax
administration. The IRS’s response to COVID-19 includes issuing more than $1.5
trillion in combined historic economic relief and individual refunds over the past two
years. This effort shows the level of dedication of our workforce and illustrates how
important the IRS is to the functioning of our government and the success of the
nation.
IRS employees have worked hard since March 2020 to implement major provisions
of the Coronavirus Aid, Relief and Economic Security (CARES) Act, ARP and other
COVID-related relief legislation. This work included delivering more than $800
billion in EIPs to help Americans cope with the financial effects of COVID-19 –
which involved creating the internal processes to accomplish this effort. The
Treasury Inspector General for Tax Administration (TIGTA) noted in a report
released March 21, 2022, that the IRS computed the correct payment amount for
more than 99 percent of the 175 million payments issued for the third round of
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EIPs. Our work also included delivering (and creating the internal processes for)
more than 200 million advance payments of the Child Tax Credit totaling $93 billion
that were made to eligible families between July and December of last year.
Congress provided critical help to support our ability to implement the third round
of EIPs and the advance CTC payments by appropriating $1.86 billion in
supplemental funding for the agency under the ARP. These funds represent
important three-year funding (expiring FY 2023) and have provided, and will
continue to provide, critical assistance in our effort to better serve taxpayers. As
of April 12, 2022, the IRS has obligated $928 million of the total; we are
continuing to use the funds over the remaining two years of the expenditure
window provided by Congress in ways that are intended to maximize taxpayer
service, including responding to taxpayer questions about EIPs and advance
CTC payments. As identified in our ARP Spending Projections provided to
Congress in February 2022, these funds are allowing us to help taxpayers
efficiently obtain the payments they are rightfully due, with additional frontline
staffing, systems and technology improvements to create safe and secure
platforms, and with investments in long-term modernization enhancements that
will pave the way for long-needed system improvements going forward.
For both the third round of EIPs and the advance CTC payments, the IRS made
an extensive effort to ensure we reached as many people as possible who might
be eligible for these benefits. We worked with thousands of community groups,
non-profits, associations, education groups and anyone else with connections to
people with children to share critical information about EIPs, the CTC and other
important benefits. As noted above, we are continuing to work this filing season to
ensure that anyone eligible who did not receive an EIP understands they can claim
the RRC on their return, and we continue reminding recipients of the advance CTC
of the need to reconcile those amounts on their returns.
Reducing inventory of paper returns and correspondence
The combination of the pandemic, new tax laws and numerous other factors led to
an unprecedented amount of unprocessed tax returns and correspondence
remaining in the IRS inventory during 2021.
The IRS pursued significant actions during the 2021 filing season to address the
return and correspondence inventory. But due to resource issues and numerous
unique factors tied to new legislation and the pandemic, we have entered the 2022
filing season with a significant inventory of unprocessed returns and
correspondence and, to date, the inability to meet our hiring goals. We must
continue pursuing innovative strategies to fulfill our commitment to return
inventories to a healthy level before entering the 2023 filing season.
To reduce the current and projected inventory, we are taking aggressive actions
that include:
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Surge Teams. We presently have more Customer Service Representatives
(CSRs) onboard than ever before. We have retained temporary CSRs on a
permanent basis to concentrate on the inventories. We took this risk in the
context of an uncertain funding environment, hoping the annual
appropriation process would deliver funding; however, this effort has not
been sufficient to reduce the current and projected inventories The IRS is
deploying surge teams, which are groups of employees across the agency
organized to temporarily assist with urgent issues. For example, we
temporarily moved approximately 900 employees with previous relevant
experience back into key areas from other organizations. In addition to this
accounts management surge team, which is now in place, we have
assembled a similar surge team for our submission processing area with
700 employees who started on this critical work in April.
Direct Hire Authority (DHA). Working with Treasury, the Office of
Personnel Management, and the National Treasury Employees Union, the
IRS recently secured direct hiring authority for a total of 10,000 positions –
5,000 employees with the goal of onboarding them in the next several
months, as well as an additional 5,000 new hires to be made over the course
of the next year. Congress also helpfully provided hiring flexibilities in the
Omnibus to further expedite hiring in critical positions. Due to the challenges
of hiring during the pandemic and competition from other employers for the
same talent, this environment is an exceptionally difficult one for hiring. DHA
may improve our ability to be competitive in cities where these employees
are most needed. We are extremely hopeful to satisfy our hiring goal over
the coming months. Also, for the first time, we have partnered with the
Military Spouse Employment Program and are engaging contractors while
aggressively pursuing our hiring goals. We are grateful for the specific direct
hiring authority language included in the recent Omnibus (Consolidated
Appropriations Act, FY22) that will enable us to bring talent on-board more
swiftly in needed locations.
Mandatory Overtime. We have implemented mandatory overtime and are
offering authorized overtime to certain employees to help with the reduction
in inventory, and we are doing so for the first time in certain functions.
Increased access to online self-service tools. Over the last several
months, more than 10 million individuals have created their individual online
account through IRS.gov. Reducing call volumes through increased online
service allows us to devote more resources to the inventories.
EIP/CTC letters. We sent more than 250 million letters to help taxpayers
match IRS records to prevent delays in processing. IRS Letter 6475, Your
Third Economic Impact Payment, and IRS Letter 6419, 2021 Advance Child
Tax Credit, set forth the amounts that individuals received in 2021.
Individuals can also verify these amounts by accessing their individual
online account through IRS.gov. Given that more than 10 million returns
failed to properly reconcile two EIP payments received in 2020 on their
returns filed during the 2021 filing season, it is critical that individuals (and
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their preparers) verify the possibly six to eight payments received in 2021
before submission of a 2021 return this year.
Innovating to expedite case closures. We are employing new tools to
help IRS employees review and process tax returns that include errors and
manual reviews, a piece that is already helping taxpayers receive refunds
quicker in 2022. These efforts have already demonstrated positive results.
Expanded Saturday openings of certain Taxpayer Assistance Centers
(TACs) to assist taxpayers this filing season in more than 90 cities around
the country. TACs provide important front line, in-person taxpayer
assistance. We maintain 358 TACs but, due to attrition and resource
limitations, 39 are presently not staffed on a full-time basis (24 TACs
presently provide a virtual service delivery alternative to an in-person visit).
All staffed TACs offer appointments as well as the ability to walk in.
Enhanced the EITC Assistant tool on IRS.gov to make it more user
friendly for individuals to determine their potential eligibility (intended to
reduce resources being dedicated to erroneous EITC claims). This
important tool serves taxpayers and reduces erroneous claims, freeing up
resources to help process our inventories.
VITA/TCE. We are also continuing to notify taxpayers about “Free Tax
Return Preparation for Qualifying Taxpayers” by encouraging use of the
IRS's Volunteer Income Tax Assistance (VITA) and Tax Counseling for the
Elderly (TCE) programs, which offer free basic tax return preparation to
qualified individuals.
Created and expanded self-service portals for taxpayers to implement
an Online Payment Agreement, request payment transcripts, request an
Identity Protection Personal Identification Number (IP PIN), update their
personal information, etc. These efforts reduce call volume, which releases
resources to help process our inventories.
Expanded “Customer Callback” to approximately 70 percent of our toll-
free telephone demand. During FY 2022, we have offered this option to
more than 5.3 million taxpayers with an acceptance rate exceeding 57
percent. We estimate this feature has saved taxpayers more than 1.7 million
hours.
Implemented Online Live Assistance, Voice Bots and Chat Bots (in
English and Spanish) to better enable taxpayers to interact with IRS.
Online Live Assistance leverages limited employee resources allowing a
single employee to respond to multiple taxpayers at a time. Our Advance
CTC Voice Bot launched February 18, 2022 (delivered 6-8 weeks ahead of
schedule) and handles the top 27 Advance CTC topics (English only at
present, but the Spanish version is coming soon) to assist callers who need
help reconciling the credits on their 2021 tax return. The IRS, in recent
weeks, has deployed Voice and Chat Bots in English and Spanish for phone
lines that assist taxpayers with tax payment issues or understanding an IRS
notice they may have received. In addition to the payment lines, Voice Bots
help people calling the EIP toll-free line, providing general procedural
responses to the most frequently asked questions. Voice Bots are software
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powered by artificial intelligence (AI) that allow a caller to navigate an
interactive voice response (IVR) system with their voice, generally using
natural language. Chat Bots simulate human conversation through web-
based text interaction, also using AI-powered software to respond to natural
language prompts. Taxpayers who request to speak with a CSR are placed
in queue for English or Spanish telephone assistance. These efforts reduce
call volume, releasing resources to help process our inventories.
Reduced the percentage of our outdated hardware from more than 60
percent a few years ago to approximately 10 percent at present. Funding
provided by Congress has allowed us to pursue these efforts, reducing the
risk associated with an interruption to our delivery of meaningful services.
These steps are making a difference. Refunds for tax returns and amended tax
returns in the inventory continue to flow out to taxpayers. We continue to consider
and pursue additional relief measures while balancing the many other demands
for our time and limited resources.
We also instituted additional relief measures for taxpayers, such as:
On January 27, we announced the suspension of notices in situations where
we have credited taxpayers for payments but have no record of the tax
return being filed. Given that in some situations the return is still waiting to
be processed, suspending this notice will help avoid confusion.
On February 9, we announced the suspension of more than a dozen
additional notices, including automated collection notices normally issued
when a taxpayer owes additional tax or has no record of filing a tax return.
As a result, we have now suspended all known notices that are associated
with unprocessed original return inventory. Specifically, any notices that are
still being sent to taxpayers are associated with ongoing programs and
services that are not associated with the unprocessed returns. Note that
many other IRS notices are statutorily required to be issued within a certain
timeframe to be legally valid.
We are evaluating penalty relief options; however, we must also determine if
systemic programming changes or manual intervention are required for the
considered relief. Manual intervention would require re-direction of resources from
processing original returns and amended tax returns, which complicates this area.
Other taxpayer assistance offerings
Important Update Information Available at IRS.gov. The IRS workforce is
working hard to reduce current and projected inventories, meet taxpayers’
continuing needs and provide relief or assistance whenever possible. We have
issued various announcements available on IRS.gov outlining important steps
we’ve taken this filing season to assist taxpayers with the aim of reducing current
and projected future inventories. On February 14, we issued a news release titled,
“IRS launches resource page on IRS.gov with latest details and information for
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taxpayers during filing season,” (IR-2022-32, February 14, 2022) with a link to this
important resource page ( “Help for taxpayers and tax professionals: Special filing
season alerts” ).
The IRS is continuing to assess other changes and system modifications to assist
taxpayers on an array of issues. We have redeployed and reallocated resources
throughout the IRS and have implemented innovative strategies in an ongoing
effort to provide a meaningful reduction in our inventories. As we make additional
adjustments, we will continue to make information available to taxpayers
throughout the filing season and beyond.
Important Steps for Current Filers to Get Their Refund as Quickly as
Possible. To prevent future inventory problems, the IRS has also worked diligently
to encourage people to take extra precautions this year so they can get their refund
quickly and avoid processing delays. For this filing season, refunds on error-free
electronically filed returns continue to be processed within approximately 21 days.
Requesting direct deposit accelerates receipt of the refund by the taxpayer. There
are three important steps people can take to get their refund as quickly as possible:
File electronically;
File an accurate return (verify amounts reflected as received for the EIP and
advance CTC payments), and;
Request a direct deposit of their refund.
These steps are critical to accelerating delivery of the refunds people deserve and
the IRS employees want to get out as quickly as possible. We have engaged in
extensive outreach with community-based and professional organizations to
reduce the otherwise manual review of returns that fail to reconcile these amounts.
We’re also encouraging taxpayers with questions to turn first to online resources,
since we anticipate a continued high call volume again this year.
Responding to unprecedented demand for phone assistance
The IRS provides phone service to individuals, businesses, tax professionals and
tax-exempt entities. We have specialty lines for the hearing impaired, identity theft
victims, the taxpayer protection program, and for making appointments at our
TACs. We also offer over-the-phone translation services in 350 languages.
Taxpayer Service Remains Our Top Priority. The long-term erosion of our
budget has depleted every function of the IRS. Even though our Wage &
Investment division - which is where the current and projected inventories exist -
remains the most well-staffed function of the entire IRS, it is well below the levels
necessary to deliver the service we aspire to achieve. We have implemented
several approaches to reducing current and projected inventories and reducing call
volumes which allows us to devote more resources to the inventories.
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Our customer service representatives (CSRs) operate from 10 main campus sites
and 14 smaller satellite locations across all mainland United States time zones,
plus Puerto Rico. The CSRs work 7 a.m. to 7 p.m. shifts staggered nationally
according to time zones. When we temporarily closed most of our facilities in
March 2020 to protect employees from COVID-19, our IT operation worked rapidly
– within weeks – to provide our CSRs with laptops, related equipment and training
so they could work remotely in a virtual environment.
Against that backdrop, IRS phone operations have faced an unusually challenging
environment over the past year, with an unprecedented level of phone assistance
demand. In 2021, we answered four million more taxpayer calls than the year
before but had a lower level of service than prior years because demand was so
high. In the first half of 2021 alone, we received more than 199 million calls – about
400 percent more calls than we get in an average year. For comparison, we
received a total of 42 million calls in all of 2018, 40 million calls in 2019, and 55
million calls in 2020. On March 15, 2021, we received 8.6 million calls on just that
one day, which is an average of about 1,500 calls per second. The high call volume
has significantly hampered our ability to manage telephone demand.
At the same time, the average duration of each call has also increased due to the
complexity of COVID-related tax law changes and because taxpayers have
personally endured a great deal throughout the pandemic. Our average time per
call was 12 minutes for calendar year 2019. Thus far in 2022 (through April 16) the
average time per call is 16 minutes. Spending more time on each call to provide
the needed customer service limits the CSRs’ ability to handle more calls during a
shift.
We attempted to ease these challenges by starting the CSR hiring process for the
2021 filing season months earlier than normal. We repeated this approach for the
2022 filing season. During the pandemic, we transitioned into an entirely virtual
recruiting and onboarding process for new employees to speed up the process.
While we were able to hire an additional 3,800 CSRs, clerks and other support
staff for the 2021 filing season, it was short of our goal of 5,000. While we did
slightly better thus far in the 2022 filing season, we still have been able to hire just
4,131 of our overall goal of 5,000. The pandemic caused significant hiring
challenges, including low applicant pools in some locations, delays in fingerprinting
due to closed facilities, and delays in processing applicants virtually. And we
routinely find ourselves being able to offer candidates significantly less than what
the private sector can. We are trying innovative training approaches to get new
CSRs ready to work the phones in less than the usual 14-week timeframe. Working
with NTEU, OPM and Congressional Appropriators, we are also thrilled to have
secured direct hire authority, discussed previously, which will allow us to be more
successful in recruiting top talent by increasing the speed with which new
employees can be onboarded.
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UPDATE ON THE 2022 FILING SEASON
The IRS successfully opened the 2022 tax season on January 24 – two weeks
earlier than the year before – giving taxpayers more time to file returns and
delivering more than 1 million refunds in the first days of processing. Getting
underway in January has given taxpayers as much time as possible to meet the
federal tax filing deadline, which this year was April 18 for most taxpayers.
Due to many factors, the 2022 tax filing season has been a complex and
challenging one for taxpayers, tax professionals and for the IRS as well. During
this tax season, taxpayers faced a number of issues resulting from critical tax law
changes that took place in 2021, as well as ongoing challenges related to the
pandemic. Our dedicated workforce has done everything it can to prepare for the
April 18 deadline, and our focus has been on simplifying the taxpayer filing
experience by streamlining the process, answering as many questions as possible
and reducing the inventories mentioned earlier in this testimony.
Our system that allows electronic filing of returns, Modernized eFile (MeF), took a
major step forward this filing season. We made the latest in a series of changes
that over time have made MeF more efficient, standardized and robust. This latest
change expanded the availability of MeF so that our external partners who transmit
returns electronically can access the system 24 hours a day, seven days a week.
This upgrade is a win not only for the transmitters and ultimately taxpayers, but
also for the IRS, because it allows us to perform MeF maintenance during the
week, enabling more rapid deployment of critical updates.
Providing help to navigate a challenging filing season
We believe the filing season has gone the smoothest for taxpayers who file
electronically, file accurate tax returns and request direct deposit of their refund.
In fact, filing electronically with direct deposit has been more important than ever
this year, given the additional complexities on many returns, such as those who
were eligible for an EIP but did not receive it and are now claiming the RRC, as
well as those who need to reconcile advance CTC payments on their return.
During the filing season we have worked to ensure families who added a
dependent – such as a child, a parent, a nephew or niece, or a grandchild – on
their 2021 income tax return who was not listed as a dependent on their 2020
income tax return to know they may be eligible to receive a 2021 RRC of up to
$1,400 for this dependent. Additionally, all eligible taxpayers with qualifying
children born or welcomed through adoption or foster care in 2021 have been
encouraged to claim the CTC – worth up to $3,600 per child– on their 2021 tax
return.
Another important credit we’ve been highlighting is the Child and Dependent Care
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Credit, which was expanded for 2021. This means that more taxpayers will qualify
this year than ever before, and the credit will be worth more. We’ve been working
to remind people who pay expenses for the care of a qualifying person while
working or looking for work that they may qualify for this important tax credit.
Depending on their income, taxpayers can get a credit worth 50 percent of their
qualifying child care expenses. For tax year 2021, the maximum eligible expense
for this credit is $8,000 for one qualifying person and $16,000 for two or more.
We realize that taxpayers who are still waiting for their 2020 return to be processed
may be wondering whether they should wait to file their 2021 return. Our message
to these individuals has been to file their 2021 return when they are ready. If a
taxpayer is electronically filing their 2021 tax return and we have not yet processed
their 2020 tax return, they should validate their 2021 electronic tax return by
entering $0 (zero dollars) as their prior year adjusted gross income (AGI). If a
taxpayer used the Non-filer Sign Up tool in 2021 to register for advance CTC
payments or an EIP, they will instead enter $1 as their prior year AGI.
Given that incredibly high call volume has continued again this tax season, we
understand the filing experience has been more difficult for taxpayers who need to
interact with us. But we continue to make improvements and are confident this
work will have us trending in the right direction. We are also encouraging taxpayers
with questions to turn first to online resources. This area has been a huge focus
for the IRS, and critical tools are available that people may overlook. These options
range from the Where’s My Refund online tool to several other automated tools
now available through the Online Account on IRS.gov. For many, there are ways
to get help without calling.
Improving service to diverse communities
Amid the challenges posed for the agency by the pandemic and new tax law
changes, the IRS has continued to focus on improving service to diverse
communities. An important way we serve these taxpayers is by communicating
with them in their most comfortable language. We are committed to enhancing the
experience of all taxpayers, including those who have limited English proficiency.
We know that these taxpayers respond to our efforts – as just one example, there
were nearly 90 million visits to non-English pages on IRS.gov last year. Already
this year, through April 10, there have been about 17.7 million visits to non-English
pages.
Since 2021, the IRS has taken important steps to further improve the amount of
service we offer in multiple languages:
Provided the Form 1040 in Spanish during the 2021 filing season for the
first time.
Gave taxpayers the opportunity to indicate on new Schedule LEP (Limited
English Proficiency) whether they want to be contacted by us in a language
other than English. This schedule, filed with the 1040, allows taxpayers to
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select one of 20 languages in which to receive communications from the
IRS. During Calendar Year (CY) 2021, the IRS received approximately
326,000 Schedule LEPs.
Made Publication 1, Your Rights as a Taxpayer, available in 20 languages.
Issued a new, streamlined version of Publication 17, Your Federal Income
Tax, that is available in seven languages.
These efforts continue this year. We’ve completed conversion of 34 Spanish notice
inserts to Braille, text, audio and large print as of January. We also recently
converted Form 1040 and its main schedules, as well as Form 1040 NR, Form
1040 SR, Form W-4 and six publications, into Spanish Braille, text, and large print.
We continue working to increase our communications and outreach materials –
including information shared on social media channels – into additional languages.
To ensure that taxpayers can easily provide their preferences in this area, we also
released new Form 9000, Alternative Media Preference, this filing season. This
form allows taxpayers to tell us they want to receive notices in Braille, large print,
audio, or text, and can be filed alone or with the 1040.
While those steps are all important, the IRS is continuing to do more to enhance
the taxpayer experience for those who are more comfortable using a language
other than English. We are, for example:
Pursuing efforts to translate website applications for these taxpayers. We
have already identified 17 of the most frequently used applications for
translation into additional languages.
Exploring opportunities to employ machine translation to help us add more
multilingual content. This is a significant challenge, given how complex
many tax terms are. We will need to carefully evaluate automated
translation tools, so we anticipate this effort will be ongoing for several
years.
UPDATE ON MODERNIZATION EFFORTS
One of my highest priorities as Commissioner is ensuring the agency’s IT
infrastructure remains on a path toward modernization. Modernization is vital to all
our core functions: successfully delivering the annual tax filing season, ensuring
the health of the nation’s tax system and supporting the federal government’s
financial strength. Today, we do not have the steady, consistent multiyear funding
to support these efforts the way we need to in order to deliver appropriately for the
American people.
We have long sought levels of funding that would enable necessary IT
investments. As noted above, absent consistent, timely, multi-year funding we
have largely been a paper-based organization operating in a digital environment.
It is difficult to modernize a significant IT portfolio to improve processing and
delivery of important taxpayer services when constantly funded through a CR.
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Until recently, we were operating under a CR for FY 2022. This year’s Omnibus
(P.L. 117-103) represents the largest funding increase for the agency in two
decades. But the agency’s needs are much deeper. Unfortunately, because our
budget has fallen so significantly in real terms over the course of the last decade,
we have lost foundational staff at the agency and need to rebuild. From a
modernization perspective, many of our priorities, including upgrading the
Individual Master File, one of the oldest IT systems in the federal government, are
multi-year efforts. This situation means we have not been able to invest in
modernizing and integrating our technological infrastructure, which processes the
more than 160 million returns we anticipate receiving this year. The situation also
affects other important interests of tax administration. Modernized technology
would significantly improve the ability of the IRS to respond to a crisis, pandemic-
related or otherwise.
Since the initial release of our Modernization Plan in 2019, our operations and
infrastructure have changed significantly. We have received only limited funding
for our efforts: from FY 2019 through FY 2021, we received only 57 percent of the
planned Business Systems Modernization funding. But within the funding received,
we have delivered critical technology improvements and at the same time
responded to unprecedented demand due to the pandemic. We accelerated the
development of our digital services. We expanded customer callback availability
on our toll-free telephone lines. We created new web applications such as “Get My
Payment” to track EIPs. We also created the Child Tax Credit Update Portal to
help people manage advance CTC payments, a first-of-its-kind endeavor. And in
another milestone, we also achieved the long-time goal of making it possible for
individuals to e-file their amended tax return.
Another example of modernization at work involved creating a tool last year to help
eliminate several steps in the process an IRS employee is required to do to
reconcile RRC discrepancies between the two EIPs that were made in 2020 and
what the taxpayer reported on their tax return. Prior to the automation, an
employee could reconcile about 100 returns per day. Once we completed the
modernization improvement, the employee can now process 600 per day. Not only
does this improvement speed up the ability for the taxpayer to receive their refund,
but it also avoids adding further to the backlog of inventory.
We continue to investigate new ways of doing business to optimize the important
work of IRS employees and improve the taxpayer experience; for example, we
hope to be able to scan in a paper form and file it electronically later this summer,
which will help us identify the potential for this approach to be used for other
forms in the future. We are also looking into our ability to leverage an approach
that we call Scanning-as-a-Service, where we may be able to significantly
increase the availability of digital images for IRS employees to use to perform
their work without owning and maintaining expensive equipment or paying to
store the paper records. Both efforts seem straightforward on the surface, and
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although we are cautiously optimistic of their progress to date, it is important to
note that they are not a sure thing, and a significant amount of work remains to
confirm the viability of these pilots, as well as their ability to scale to other use
cases.
In addition to the above, we continue taking steps to safeguard taxpayer data while
modernizing platforms to improve taxpayers’ experiences. Investments in
cybersecurity are essential. In 2017, IRS was experiencing just over 1 million
cyberattacks per day. Today, we sustain more than 1.5 billion attacks each year.
While IRS network defenses mitigate threats and keep our core tax processing
systems secure, we must continue to advance our cyber capabilities, so we stay
one step ahead of the bad actors who are attacking IRS systems.
IRS Online Account
An important focus of our efforts has been the development of IRS Online Account,
which allows taxpayers to interact with us online and perform various types of
transactions in a secure environment. For example, they can view their payment
history, make a payment online or request previous years’ tax information. Since
the initial launch of IRS Online Account in 2016, we helped taxpayers securely
access the information and services they need, with more than 23 million sessions
and 8.37 million new users in FY 2021. We are continually working to expand the
transactions taxpayers can conduct through the online account.
In July of last year, we launched a new online feature that allows individual
taxpayers to authorize their tax practitioner to represent them before the IRS with
a Power of Attorney (POA), and to view their tax accounts with a Tax Information
Authorization (TIA). Tax professionals can go to the Tax Pro Account on IRS.gov
to digitally initiate POAs and TIAs. Over time, we will continue building functionality
so that other transactions involving tax professionals can be completed online in a
secure digital environment.
As we expand our digital options, security is always an important consideration.
For that reason, in February we announced steps to change the way taxpayers
authenticate their identities when signing on to their online accounts. Specifically,
we began transitioning away from using a third-party service for facial recognition.
The IRS is working closely with partners across government to roll out Login.Gov
as an authentication tool for us. The General Services Administration is currently
working with the IRS to achieve the security standards and scale required of
Login.Gov, with the goal of moving toward introducing this option later this year.
EFFORTS TO IMPROVE TAX COMPLIANCE
The IRS remains committed to doing everything we can, with our limited resources,
to track down those who willfully refuse to fulfill their tax obligations or who commit
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tax fraud. We want to maintain a strong, visible, robust tax enforcement presence
to appropriately support taxpayers who comply voluntarily. When taxpayers file
their returns, they should feel confident others are doing the right thing too.
Our efforts to ensure compliance with the tax laws cover a broad range of groups
– individuals, small businesses, tax-exempt organizations and large entities. In our
challenging resource environment, large entities are of particular concern because
this group includes very sophisticated taxpayers – major U.S. corporations,
multinational companies and complex multi-tiered partnerships – all of which
require us to have highly trained, highly skilled enforcement personnel with special
accounting and tax law skills, who can understand the issues raised by these
returns, root out instances of noncompliance and litigate issues where necessary.
We will continue emphasizing a number of special areas in our enforcement
activities. This strategy includes keeping a focus on high-income taxpayers
engaged in offshore noncompliance, failure to file, unreported and improperly
reported virtual currency transactions and abusive tax shelters, such as syndicated
conservation easements and micro-captive insurance shelters, as well as
monetized installment sales and Malta pension abuses.
In this challenging environment, the IRS continues working to improve coordination
of enforcement activities across the agency. In fact, the IRS’s Office of Fraud
Enforcement (OFE), which we created in March 2020, is actively encouraging and
ensuring this coordination across the IRS, promoting compliance, strengthening
the IRS’ response to fraud and working to mitigate emerging threats. The Office of
Promoter Investigations (OPI), created last year, is helping us better identify issues
that involve abusive tax shelters as well as individuals promoting abusive tax
transactions.
It is vital that we improve our ability to identify and deter promoters, and that we do
so more quickly – before they are able to widely market their transactions, as we
have seen with syndicated conservation easements and micro-captive insurance.
We are seeing many aggressive transactions being promoted on social media and
the internet, and we continually work to identify and evaluate potentially abusive
trends and transactions to determine whether they need further enforcement
actions. I have challenged OPI to lead our efforts against not only those who
promote abusive tax avoidance transactions we know about, but to find the
transactions that are being concocted today, and to coordinate our efforts to stop
those promoters quickly and efficiently.
Recent accomplishments
We have made progress in a number of enforcement areas. For example, over
the past two years, we have shifted significant examination resources and
technology to increase our focus on high-income and high-wealth taxpayers. As
a result, examination coverage of the taxpayers in the highest income category
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(taxpayers with over $10 million of total positive income) increased to over 8
percent coverage for Tax Year (TY) 2018, the most recent year for which
complete statistics are available. This level is the highest coverage rate of this
growing population since TY 2014, and we expect the TY 2019 numbers will
show this level of coverage continued.
Substantially all experienced examiners – those who are the most highly trained
with substantial accounting and tax law skills – are almost entirely focused on tax
returns that include complex issues, such as high-income taxpayers, pass-
through entities, multi-national taxpayers involving international tax issues, large
pension plans, private foundations and the most egregious situations. We also
continue to focus on employment tax cases where employers have failed to pay
over taxes withheld from employees or have failed to file their employment tax
returns.
An IRS initiative announced in 2020 involves improving tax compliance by
increasing visits to those generally with incomes above $100,000 who failed to file
tax returns. These Revenue Officer Compliance Sweeps (ROCS) focus on the
most egregious non-filers. A partnership between our Field Collection operations,
the OFE and our Criminal Investigation (CI) division also worked to identify
common attributes of successful fraud referrals resulting in recommendations for
criminal investigation for non-filers.
Another example of our accomplishments involves the development of a
comprehensive, coordinated enforcement strategy to address abusive syndicated
conservation easement transactions, and we have worked closely with the U.S.
Department of Justice to shut down the promotion of them. Subsequently, the U.S.
Tax Court held in the government’s favor in a number of conservation easement
cases, supporting the IRS’s position on the abusive nature of the underlying
deductions in these cases. While continuing to investigate these transactions, the
IRS has also made settlement offers to certain taxpayers with docketed cases at
the Tax Court involving this type of transaction.
Our efforts have also borne fruit in another important area--employment tax fraud.
Non-compliance in this area means employers cheat the system and their
employees without consequence. In so doing, they gain an unfair advantage over
their honest competitors. We continue to work with the Justice Department’s Tax
Division to identify opportunities to better address non-compliance. These
opportunities include using data analytics to identify egregious noncompliant
employers. To cite one instance, we used our Innovation Lab’s Data Analytics
Program to identify thousands of taxpayers who reported wages on their individual
income tax returns where the employer who paid those wages did not file their W-
2 forms with the Social Security Administration and neither filed employment tax
returns nor remitted taxes withheld from their employees. Seriously noncompliant
employers were further investigated by the IRS examination, collection and CI
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organizations. This agency-wide commitment ensures consistent treatment of
taxpayers and fair application of the tax law.
The IRS’s enforcement efforts have extended to preserving COVID-related
financial relief for those legitimately in need of financial support during this crisis.
For example, the IRS has been working diligently to thwart scams related to
COVID-19 by alerting taxpayers and tax professionals to these scams – especially
calls and email phishing attempts tied to the EIPs. The IRS and our partners
throughout the country have been publicizing these scams. Another example
involves the OFE’s efforts to prevent ineligible claimants from obtaining $1.2 billion
in COVID-related employer credits. The credits were intended to help employers
retain employees who would otherwise be unable to work during the pandemic,
but bad actors saw an opportunity to exploit the program for their own financial
gain. Working collaboratively with teams of seasoned enforcement employees who
identified the questionable claims, OFE investigated the suspect claims and either
administratively disallowed the claims and/or referred cases for further
investigation.
In noting accomplishments on enforcement, I continue to be extremely proud of
the investigative work done by CI. To take just one recent example, CI’s Cyber
Crimes Unit played a key role in the largest cryptocurrency seizure ever recorded
for the federal government, valued at more than $3.6 billion. In February 2022, the
Justice Department announced the arrest of two individuals in connection with an
alleged conspiracy to launder cryptocurrency stolen during a 2016 hack of Bitfinex,
a virtual currency exchange. IRS-CI Cyber Crimes Unit special agents were critical
in unraveling a sophisticated laundering technique, enabling them to trace, access
and seize the stolen funds. As well as being the largest cryptocurrency seizure,
this was also the largest single financial seizure recorded by the federal
government.
In regard to recent events, CI is prepared to support the U.S. government’s efforts
to impose sanctions on Russia. CI has a track record of successfully rooting out
and stopping illegal kleptocracy money flowing into or through the U.S. CI’s special
agents expertly target those who launder money, including active investigations
involving Russian oligarchs and politicians, as well as those who facilitate the illicit
movement of money on behalf of sanctioned individuals or organizations. Agents
on the Global Illicit Financial Team and throughout CI are not only experts in tracing
assets and understanding the complex global financial world; they also work
seamlessly with our domestic and global law enforcement partners to ensure the
integrity of the U.S. financial system on behalf of U.S. taxpayers.
Resource challenges
Despite the progress we have made, our ability to enforce the tax laws against
non-compliant taxpayers with complex returns continues to be hampered by a lack
of resources. We can no longer audit a respectable percentage of large
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corporations, and we are often limited in the issues reviewed among those we do
audit. These corporations can afford to spend large amounts on legal counsel, drag
out proceedings and bury the government in paper. We are, quite simply,
“outgunned” in our efforts to assure a high degree of compliance for these
taxpayers. It is unacceptable for the nation’s tax administrator to be outgunned
when appropriately challenging the return positions of some of the most
sophisticated taxpayers. We must receive the resources to hire and train more
specialists across a wide range of complex areas to assist with audits of entities
(taxable, pass-through and tax-exempt) and individuals (financial products;
engineering; digital assets; cross-border activities; estate and gift planning; family
offices; foundations; and many others).
A lack of resources also threatens to reduce the effectiveness of our criminal
investigative work. Much like other operating divisions in the IRS, CI is close to its
lowest staffing level in the past 30 years. With fewer agents, we have fewer cases
and fewer successful convictions. A strong, robust criminal tax enforcement
presence provides significant deterrence to those willing to evade their lawful
obligations to our country. Without adequate resources, we risk sending a much
less powerful message to would-be and active tax evaders.
Because of our current funding and staffing limitations across our enforcement
functions, we are forced to make difficult decisions regarding priorities, the types
of enforcement actions we employ, and the service we offer. Limited IT resources
preclude us from building adequate solutions for efficiently matching or reconciling
data from multiple sources. As a result, we are often left with manual processes to
analyze reporting information we receive. Such is the case with data from the
Foreign Account Tax Compliance Act (FATCA). Congress enacted FATCA in
2010, but we have yet to be appropriated any significant funding for its
implementation. This situation is compounded by the fact that when we do detect
potential non-compliance or fraudulent behavior through manually generated
FATCA reports, we seldom have sufficient funding to pursue the information and
ensure proper compliance. We have an acute need for additional personnel with
specialized training to follow cross-border money flows. They will help ensure tax
compliance by improving our capacity to detect unreported accounts and income
generated by those accounts, as well as the sources of assets in offshore
accounts.
In other programs, we have information but are unable to select all high-risk cases
identified due to resource and funding constraints. In these situations, to the
detriment of tax administration, we must make difficult enforcement decisions
based on resources, return on investment, coverage of all types of taxpayers, and
other high priority work. For example, our information document reporting
programs are identifying potential discrepancies with taxpayers who have received
Form 1099-K, Payment Card and Third-Party Network Transactions (including
potential non-filers), but not all of these have been addressed due to resource
constraints.
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As we make enforcement decisions, we try to balance resource limitations across
a number of factors, including evaluating overall compliance effect and focusing
resources into special projects. For example, we currently have fewer than 2,000
revenue officers, the lowest number of field collection personnel since the 1970s,
and we have over 100,000 collection cases in active inventory. In addition to our
active inventory, we have over 1.5 million cases (more than 500,000 of which are
considered high priority) awaiting assignment to these same 2,000 revenue
officers. We have classified roughly 85 percent of those cases as high priority,
many of which involve delinquent business employment taxes.
In discussing our resource situation, another major concern is our ability to
investigate and take enforcement actions against abusive transactions. While we
are doing our best with the resources available to us, it is important to point out
that the lack of funds and staffing makes it increasingly difficult for us to keep up
with – much less stay ahead of – those who promote abusive transactions and the
tax evaders who engage in them. Shelter promoters continue to innovate and
invent new ways of gaming the system. We continue working to find them and
identify their methods, but in order to ensure we can take meaningful enforcement
actions against them, it is critical that we receive adequate resources.
It is becoming easier for tax shelter promoters to pitch their wares to the wealthy,
and we are concerned such pitches are taking hold. While we are doing what we
can, we need more resources if we hope to keep these activities in check and
continue our efforts to inform taxpayers about the problems with these transactions
so they will be dissuaded from participating in them. These activities shift the
required funding of our country onto the backs of wage earners. Everyone should
pay their fair share, and no one should be able to inappropriately avoid their
obligations.
LOOKING TO THE FUTURE: IRS TAXPAYER EXPERIENCE OFFICE
Along with our day-to-day efforts to help taxpayers and enforce the tax laws, our
agency is also committed to delivering on the promise of a new IRS. We are
continuing the work begun in 2019 with passage of the Taxpayer First Act (TFA)
to develop an innovative approach to the future of tax administration that will better
serve everyone, including those in underserved communities. The IRS is using the
implementation of the TFA to make significant improvements in the way we serve
taxpayers, enforce the tax laws in a fair and impartial manner, and ensure our
workforce collaborates and is well-trained.
A key driver of these efforts is our Taxpayer Experience Office, launched last year
to unify and expand the work being done across the agency to serve taxpayers.
The Taxpayer Experience Office sets the strategic direction for improving the
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taxpayer experience and identifies opportunities to make continuous
improvements in real time for taxpayers and the tax professional community.
The Taxpayer Experience Office will identify changing taxpayer expectations and
industry trends, focus on customer service best practices, and promote a
consistent voice and experience across all taxpayer segments by developing
agency-wide taxpayer experience guidelines and expectations. The office will be
adding staff in the coming months to help support the effort.
Some of the areas of improvement in the near term include expanding customer
callback, expanded payment options, secure two-way messaging and more
services for multilingual customers. These activities build on recent improvements
such as digital tools to support EIPs and advance CTC payments, online chat and
the online tax professional account.
THE PRESIDENT’S FY 2023 BUDGET
The President’s FY 2023 Budget proposal for the IRS provides $14.1 billion, an
increase of $2.2 billion, or 18 percent more than the FY 2022 Annualized
Continuing Resolution level of $11.9 billion, to administer the nation’s tax system
fairly, collect more than $4 trillion in gross taxes to fund the government, and
strengthen tax compliance. Because the Administration drafted the FY 2023
budget submission ahead of the enactment of the FY 2022 Omnibus, the
submission was not able to reflect the final enacted FY 2022 funding levels. The
Budget includes initiatives to improve the taxpayer experience that should
ultimately lead to increased voluntary tax compliance. The request also aims to
ensure we stay current with the paper inventory and improve telephone and in-
person service; facilitates better oversight of high-income and corporate tax
returns; and accelerates the development of digital tools to enable smarter
communication with taxpayers. In addition, the Administration continues to support
a multiyear investment in IRS enforcement to increase tax compliance. An
appropriate level of funding for the IRS will allow the agency to continue enhancing
the taxpayer experience, narrowing the tax gap to ensure equitable administration
of the tax code, protecting IRS systems and taxpayer data, and modernizing our
information technology systems.
Specific funding areas
The FY 2023 Budget requests a total program increase of $1.31 billion, including
the following:
Putting Taxpayers First: $320.2 million to continue implementing the
Taxpayer First Act (TFA), which requires the IRS to put in place a Taxpayer
Experience Strategy to improve the taxpayer experience with the IRS. The
IRS’s Taxpayer Experience Office, in partnership with key internal and
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external stakeholders and subject matter experts, identified certain areas of
focus to inform development and implementation. The FY 2023 request
focuses on: continuing to protect taxpayer data; increasing outreach and
taxpayer education efforts; developing strategies to reach underserved
communities; and providing human resources support for implementing the
TFA.
Enhancing Taxpayer Service: $389.1 million for increasing the telephone
Level of Service (LOS) and enhancing information technologies to improve
taxpayer services. This investment will build on the IRS’s efforts to improve
telephone services for the underserved, such as those who are deaf or hard
of hearing, limited English proficiency communities, and victims of identity
theft. This investment provides a projected LOS of 85 percent in FY 2023
assuming phone demand returns to pre-pandemic levels and the IRS can
provide in-person services at pre-pandemic levels. The increase in funding
also will improve the ways taxpayers interact with the IRS by enhancing and
expanding the range of modern, digital tools provided by the IRS to deliver
a service experience comparable to that available in the private sector. By
empowering taxpayers to address certain needs without requiring live
assistance, development of these tools is essential to the IRS’s long-term
success in satisfying taxpayer expectations and meeting the ongoing
growth in demand for assistance.
Increasing Compliance to Ensure Fairness: $469.3 million to allow the
IRS to continue improving upon its compliance strategies and enforcement
activities – including examination, collection and investigation – to ensure
fairness in the tax system and narrow the tax gap. We continue to develop
innovative approaches to understanding, detecting, and resolving potential
noncompliance, which helps to maintain taxpayer confidence in the tax
system. It is important to note the IRS has an overall enforcement return on
investment (ROI) of about $5 for every $1 invested compared to the IRS
appropriated budget, not including significant deterrence effects.
Maintaining Critical IT Operations: $39.5 million to sustain these
operations to maintain optimum network performance and functionality. The
IRS continues to transform its technological landscape, and it has made
progress on its modernization journey to provide taxpayers with a seamless
customer experience, while empowering employees with the tools and
systems needed to provide top quality services and enforce the tax law.
These successes have increased the need to sustain critical IT operations
to maintain optimum network performance and functionality. The IRS
continues to deploy and incorporate new, modernized tools for taxpayers,
tax professionals and employees. Taxpayer service improvements
(additional digital services, up-to-the-minute account information, etc.),
enterprise efficiency advances (automation, artificial intelligence, machine
learning, etc.) and new employee tools (case management, collaboration,
learning platforms, etc.) all require additional bandwidth to sustain a high
volume of users processing digitalized capabilities.
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Fostering Economic Development in Underserved Communities: $10.2
million to allow the IRS to cultivate new opportunities for adults and students
in underserved communities. One focus of our efforts is the Mississippi
Delta Region, which currently has the highest rate of poverty in the United
States, excluding the U.S. territories. As an initial step, we are opening a
new Automated Collection System (ACS) call site in Clarksdale, Mississippi,
and have announced plans to hire contact representatives to work at the
call site. Initiatives in other regions are already underway, including a
significant staffing increase for our ACS operation in Puerto Rico. We have
increased staff at this site from approximately 79 employees in FY 2020 to
more than 400 as of February 2022. We plan to add another ACS call site
in Puerto Rico during 2022 that will accommodate an additional 400
employees. The expansion offers employment to Puerto Rico residents and
allows for a significant increase in bilingual ACS employees to better serve
taxpayers with limited English proficiency.
Structural changes to IRS appropriations to improve mission delivery
The President’s Budget also proposes a change to the appropriations language
that would allow Taxpayer Services and Enforcement funding to be used for certain
associated support costs that are currently reserved for Operations Support
funding. Currently, Taxpayer Services and Enforcement funding only pays for an
employee’s labor cost, not the cost to hire the employee nor the IT equipment and
space needed to make them productive. There are significant benefits to this
change: By including support costs, future IRS budgets would reflect the full cost
of Taxpayer Services and Enforcement. The changes would also prompt IRS
business units to be more efficient with their support costs because they would
stand to directly benefit from savings.
In addition to the IRS’s FY 2023 budget request, stable, multi-year funding for the
IRS is necessary to facilitate the types of longer-term investments that the agency
needs to make to adequately serve the American people and enforce the tax laws.
LEGISLATIVE PROPOSALS IN THE PRESIDENT’S FY 2023 BUDGET
Along with the funding requested in the President’s FY 2023 Budget request, we
are also asking for Congress’s help legislatively in several important areas that
would improve tax administration, including the following:
Information reporting by financial institutions and digital asset
brokers. Over time, the U.S. has established a broad network of information
exchange relationships with other jurisdictions based on established
international standards. The information obtained through those
relationships has been central to recent successful IRS enforcement efforts
against offshore tax evasion. The ability to exchange information
reciprocally is particularly important in connection with the implementation
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of the Foreign Account Tax Compliance Act (FATCA). Currently, however,
the U.S. provides less information to foreign governments than we receive
from them. The proposal would expand reporting by financial institutions
and digital asset brokers in a number of ways – for example, by requiring
financial institutions to report the account balance for all financial accounts
maintained at a U.S. office and held by foreign persons. These new
reporting requirements would enable the IRS to provide equivalent levels of
information to cooperative foreign governments in appropriate
circumstances to support their efforts to address tax evasion by their
residents. The proposal would be effective for returns to be filed after
December 31, 2023.
Require reporting by certain taxpayers on foreign digital asset
accounts. Section 6038D(b) of the Internal Revenue Code contains an
annual reporting requirement for individuals in regard to two categories of
foreign financial assets, but there is no reporting requirement under this
section for digital assets. Against this backdrop, tax compliance and
enforcement with respect to digital assets is a rapidly growing problem. The
global nature of the digital assets market offers opportunities for U.S.
taxpayers to conceal assets and taxable income by using offshore digital
asset exchanges and wallet providers. The proposal would amend section
6038D(b) to require reporting with respect to a new third category of asset:
that is, any account that holds digital assets maintained by a foreign digital
asset exchange or other foreign digital asset service provider. Reporting
would be required only for taxpayers that hold an aggregate value of all
three categories of assets in excess of $50,000. The proposal would be
effective for returns required to be filed after December 31, 2022.
Extend the statute of limitations for certain tax assessments. Section
6501 of the Internal Revenue Code generally requires the IRS to assess a
tax within three years after the filing of a return. But for complex audits in
the largest cases, critical issues may not be identified until late in the
process of an examination, and in many cases these issues cannot be
pursued further due to time and resource constraints. The proposal would
amend section 6501 to extend the three-year statute of limitations to six
years if a taxpayer omits from gross income more than $100 million on a
return. This change would give the IRS enhanced agility and flexibility in
evaluating and staffing its case inventory and appropriately allocating its
limited enforcement resources.
Increase oversight of paid tax return preparers. Paid tax return
preparers have an important role in tax administration because they assist
taxpayers in complying with their obligations under the tax laws. The
proposal would amend Title 31, U.S. Code (Money and Finance) to provide
the Secretary with explicit authority to regulate all paid preparers of Federal
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tax returns, including by establishing mandatory minimum competency
standards. The proposal would be effective on the date of enactment.
Expand and increase penalties for return preparation and e-filing.
Inappropriate behavior by paid tax return preparers harms taxpayers
through the filing of inaccurate returns, erroneous refunds and credits and
personal tax return noncompliance. Tax return preparer misconduct
continues, in part, because the amounts of the penalties under current law
do not adequately promote voluntary compliance. The proposal would
increase the amount of the tax penalties that apply to paid tax return
preparers for willful, reckless or unreasonable understatements, as well as
for forms of noncompliance that do not involve an understatement of tax.
Expand authority to require electronic filing for forms and returns.
Under this proposal, electronic filing would be required for returns filed by
taxpayers reporting larger amounts or that are complex business entities,
including: (1) income tax returns of individuals with gross income of
$400,000 or more; (2) income, estate, or gift tax returns of all related
individuals, estates, and trusts with assets or gross income of $400,000 or
more in any of the three preceding years; (3) partnership returns for
partnerships with assets or any item of income of more than $10 million in
any of the three preceding years; (4) partnership returns for partnerships
with more than 10 partners; (5) returns of real estate investment trusts, real
estate mortgage investment conduits, regulated investment companies and
all insurance companies; and (6) corporate returns for corporations with $10
million or more in assets or more than 10 shareholders. Further, electronic
filing would be required for the following forms: (1) Forms 8918, “Material
Advisor Disclosure Statement”; (2) Forms 8886, “Reportable Transaction
Disclosure Statement”; (3) Forms 1042, “Annual Withholding Tax Return for
U.S. Source Income of Foreign Persons”; (4) Forms 8038-CP, “Return for
Credit Payments to Issuers of Qualified Bonds”; and (5) Forms 8300,
“Report of Cash Payments Over $10,000 Received in a Trade or Business.”
Return preparers that expect to prepare more than 10 corporation income
tax returns or partnership returns would be required to file such returns
electronically. The Secretary would also be authorized to determine which
additional returns, statements, and other documents must be filed in
electronic form in order to ensure the efficient administration of the internal
revenue laws without regard to the number of returns that a person files
during a year.
Improve reporting for payments subject to backup withholding. The
proposal would treat all information returns subject to backup withholding
similarly. Specifically, the IRS would be permitted to require payees of any
reportable payments to furnish their TINs to payors under penalty of perjury.
The proposal would be effective for payments made after December 31,
2021.
25
CONCLUSION
Chairman Van Hollen, Ranking Member Hyde-Smith and Members of the
Subcommittee, thank you again for the opportunity to update you on the filing
season and IRS operations.
We continue to balance multiple unprecedented demands, including continuing the
filing season and work on important new tax provisions. We remain focused on
numerous taxpayer-related issues, and we have pursued innovative ideas and
processes not previously deployed by the IRS in an effort to make improvements
to the current inventory and provide meaningful taxpayer services.
The reality at the IRS is that we know we need to do better; we're committed to
doing better, and we are trending in a positive direction. We appreciate your
patience and understanding and the many expressions of gratitude we have
received for the efforts of our employees, who have consistently stepped forward
despite their own health and safety concerns. Our employees are doing
everything they can. But we need Congress to help us by providing adequate
resources and a sustained, multiyear investment in the agency.
I continue to be extremely proud of our workforce and their dedication to helping
American taxpayers fulfill their tax responsibilities and resolve tax issues.
26
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