blowing bubbles

National Taxpayer Advocate Delivers Annual Report to Congress

The report addressed the impact of the shutdown and urges more funding for IT modernization.

National Taxpayer Advocate Nina E. Olson released her 2018 Annual Report to Congress, describing challenges the IRS is facing as a result of the recent government shutdown and recommending that Congress provide the IRS with additional multi-year funding to replace its core 1960s-era information technology (IT) systems. The release of the National Taxpayer Advocate’s report was delayed by a month because of the government shutdown.

Olson also released the second edition of the National Taxpayer Advocate’s “Purple Book,” which presents 58 legislative recommendations designed to strengthen taxpayer rights and improve tax administration.

The largest section of the report, which identifies at least 20 of the most serious problems taxpayers face in their dealings with the IRS, is titled, “The Taxpayer’s Journey,” and is organized sequentially to track a taxpayer’s interactions with the tax system from start to finish. Among other issues, it addresses the ability of taxpayers to obtain answers to tax-law questions, return filing, notices, audits, collection actions and Tax Court litigation. The report also contains “road maps” – pictorial representations of the process.

“One of our goals in creating these roadmaps was to help readers understand the complexity of the taxpayer journey,” Olson wrote. “It was challenging for us to create these roadmaps and will probably be difficult for readers to follow them, which hints at the extreme frustration many taxpayers experience when they have to interact with the IRS.”

Nina E. Olson, National Taxpayer Advocate

Impact of the government shutdown on IRS operations and taxpayer rights

In the preface to the report, Olson discusses the impact of the recent government shutdown. A major point of discussion before and during the shutdown was the permissible scope of IRS activities. Under the Anti-Deficiency Act, federal funds may not be spent in the absence of an appropriation except where otherwise provided by law. One exception provided by law is for “emergencies involving the safety of human life or the protection of property.” Although not stated in the law or Justice Department guidance, the IRS Office of Chief Counsel has interpreted the “protection of property” exception to apply only to the protection of government property – not a taxpayer’s property.

The report says this narrow interpretation can cause severe harm to taxpayers. When the IRS issues a levy to a bank, the bank must freeze the taxpayer’s account for 21 days, and then if the levy has not been released, the bank must turn the funds over to the IRS. The Internal Revenue Code requires the IRS to release a levy if it has determined the levy “is creating an economic hardship due to the financial condition of the taxpayer.” However, the IRS’s legal interpretation of the Anti-Deficiency Act would not permit personnel to be excepted to release levies even in extreme cases, such as where a taxpayer needs the levied funds “to pay for basic living expenses [or even] a life-saving operation,” Olson wrote.

The IRS’s Lapsed Appropriations Contingency Plans excepted employees of the Taxpayer Advocate Service (TAS) to open mail solely to search for checks payable to the government. The plans do not permit TAS employees to assist taxpayers experiencing an economic hardship.

“The IRS’s authority to collect revenue is not unconditional,” Olson wrote. “It is conditioned on statutory protections, and a lapse in appropriations does not eliminate those protections.” If the IRS does not change its interpretation of the Anti-Deficiency Act, the report recommends Congress amend the Act to ensure that taxpayer protections and rights enacted by Congress remain available when the IRS takes enforcement action against a taxpayer during, or has taken enforcement action just prior to, a shutdown.

The report says the shutdown has had a significant impact on IRS operations. The IRS opened the 2019 filing season immediately after the shutdown ended, and a comparison of IRS telephone service during the first week of the 2019 filing season and the first week of the 2018 filing season shows taxpayers are having greater difficulty getting help this year. During the first week of the 2018 filing season, the IRS answered 86 percent of calls routed to an Accounts Management telephone assistor, and the average wait time was about four minutes. During the first week of this year’s filing season, the IRS answered only 48 percent of its calls, and the average wait time was 17 minutes.

Among taxpayers calling the Automated Collection System line, 65 percent got through and waited an average of 19 minutes last year. This year, only 38 percent of calls were answered, and the average wait time was 48 minutes.

Among callers seeking help on the IRS’s Installment Agreement/Balance Due telephone line, the IRS answered 58 percent of its calls with an average wait time of 30 minutes during the first week of the filing season last year. This year, the IRS answered only 7 percent of its calls, and taxpayers who got through had to wait an average of 81 minutes to speak with an assistor.

During the shutdown, correspondence inventories ballooned. By January 24, the IRS had more than five million pieces of mail waiting to be processed; it had 80,000 responses to fiscal year (FY) 2018 Earned Income Tax Credit (EITC) audits that had not been addressed (likely causing eligible taxpayers to have their legitimate EITC claims frozen during the 2019 filing season); and it had 87,000 amended returns waiting to be manually processed.

“Make no mistake about it,” Olson wrote. “These numbers translate into real harm to real taxpayers. And they represent increased re-work for the IRS downstream, at a time when the IRS is already resource-challenged. The IRS will be facing tough decisions in light of the shutdown’s impact.”

On a “dedication” page at the beginning of the report, Olson expressed her appreciation to the IRS workforce, including TAS employees. “Most IRS employees experienced financial challenges as a result of missing two pay checks,” she wrote. “Yet when the shutdown ended, IRS employees returned to work with energy and generally hit the ground running. The IRS faces many challenges as an agency – and this report documents many of them – but the dedication of the IRS workforce is a notable bright spot.”

Funding for IT modernization

The report’s #1 legislative recommendation is that Congress provide significantly more funding for the IRS to replace its antiquated core IT systems. The IRS systems that hold the official records of taxpayer accounts — the Individual Master File and the Business Master File — date to the 1960s and are the oldest major IT systems still in use in the federal government. In addition, taxpayer information is stored in over 60 separate case management systems that generally do not communicate with each other. There is no database that holds or provides a 360-degree view of the taxpayer’s account and interactions with the IRS. As a result, although the IRS is trying to create taxpayer-friendly online accounts, the report says the inability to pull data from a consolidated case management system poses a significant obstacle.

The report says the IRS does not have an enterprise case selection system, so it cannot be sure it is focusing on the right taxpayers or the right issues in its outreach, audit, and collection activities. A key measure of audit effectiveness is the “no change” rate, which reflects the percentage of audits that do not change a taxpayer’s liability for the year under audit. From FY 2010 through FY 2018, the report says, the average no change rate was 23 percent for field audits conducted by the Small Business/Self-Employed Division and 32 percent for field audits conducted by the Large Business and International Division. With better technology, the report says, the IRS audit functions could do a better job of selecting productive cases.

In 2018, the IRS experienced a systems crash on the final day of the filing season, forcing it to extend the filing season by a day. The crash prompted talk of the risk of a catastrophic systems collapse. “That risk does, indeed, exist,” the report says. “But there is a greater risk: IRS performance already is significantly limited by its aging systems, and if those systems aren’t replaced, the gap between what the IRS should be able to do and what the IRS is actually able to do will continue to increase in ways that don’t garner headlines but increasingly harm taxpayers and impair revenue collection.”

According to the report, the IRS is effectively the “accounts receivable department” of the federal government. In FY 2018, it collected nearly $3.5 trillion on a budget of $11.43 billion — a return on investment of about 300:1. Yet the report says funding for IRS technology upgrades — provided through the Business Systems Modernization (BSM) account — has been very limited in both absolute and relative terms. As the following chart shows, BSM funding was reduced by 62 percent from FY 2017 ($290 million) to FY 2018 ($110 million) and constituted just one percent of the agency’s overall appropriation in FY 2018.