On April 8, IRS Commissioner Charles Rettig appeared before the U.S. Senate Finance Committee for an oversight hearing on the IRS budget and the 2022 filing season. The agency says it has a backlog of 7.2 million unprocessed individual returns, is currently taking about 350 days on average to resolve identity theft cases, and recently lost the CIC Services case 9 to 0 in the U.S. Supreme Court after claiming IRS regulations could not be challenged in court. In February, we released a report with 15 ideas for immediate steps the IRS and Congress could take to ease filing burdens for taxpayers; the agency has yet to take us up on many of them.
Here are some notable comments and insights from the hearing:
Chairman Ron Wyden (D-OR) opened the hearing by giving statistics on IRS staffing shortfalls and how it's missing metrics on customer service (answering the phone, opening the mail, etc.).
Ranking Member Mike Crapo (R-ID) gave examples of ideas for more efficient IRS operations from the National Taxpayer Advocate reports. Crapo said any claim budget issues are entirely to blame is “misdirection” and noted that IRS supporters usually do budget comparisons using 2010, an outlier year for the IRS budget.
In his opening remarks, Commissioner Rettig said "taxpayer service is the most significant IRS priority." He says the agency’s goal is to get caught up on the backlog by the end of calendar 2022, before the 2023 filing season. Rettig said 2.7 million returns from 2021 and 2.3 million returns from 2022 "in inventory" (unprocessed). He said they've cleared about 90% of the "error resolution" backlog. "We're trending in the right direction."
Wyden asked about the size of the tax gap, and if the IRS can produce up to date estimates of who is cheating. Rettig says this summer the agency will have estimates for 2014-16, to which Wyden replied, “that’s dated.” Rettig said it will include estimates for 2019 but will not include the virtual world as the agency does not have a methodology to calculate that yet.
Wyden asks why the IRS doesn't use scanning technology and bar code technology to process paper returns. Rettig claimed it’s due to inadequate funding.
Sen. Chuck Grassley (R-IA) said his staff waits 245 days to get answers from the IRS, which he acknowledges is down from 570 days last year. He asked why the IRS isn't fully back to work yet. Rettig replied that 99 percent are, but then conceded this includes teleworking employees.
Grassley asked how the IRS has spent computer modernization funds. Rettig mostly talked about how that money was spent before he was Commissioner. Wyden jumps in to say that the U.S. Government Accountability Office blamed funding delays for problems.
Sen. Tom Carper (D-DE) asked if multiyear funding would help the IRS. Rettig replied, "it is impossible to build a robust technology infrastructure - public sector or private sector - when you don't have consistent, timely, multiyear funding." (This might be news to many small business owners.)
Sen. Bob Menendez (D-NJ) thanked IRS employees for working hard on clearing the backlog. He asks how many new employees the IRS is hiring. Rettig said the goal is 10,000, and so far they have hired 2,000.
Sen. Sheldon Whitehouse (D-RI) asked if the IRS is helping efforts to sanction Russian oligarchs. Rettig said yes. Whitehouse asked a long hypothetical about affiliated entities with the same office, same staff, and same board, that can spend half their money on politics each year. He also asked if the IRS coordinates with the Federal Election Commission to refer inconsistent statements to the Justice Department. Rettig says he's open to it.
Sen. Rob Portman (R-OH) says his constituents need processed tax returns to get business loans. He referenced his past bills with Sen. Cardin and a forthcoming bill that will reform IRS customer service. Rettig said they need more money.
Sen. Pat Toomey (R-PA) cited a constituent who mailed his tax return with a check, and the IRS now claims they never got the return even though they cashed the check. The constituent tried to call, but callers have a 1 in 10 chance of reaching a human. Rettig said they're reducing the backlog, and that every 10 percent of phone calls answered requires $100 million.
Sen. Ben Cardin (D-MD) referenced his legislation with Toomey on multiyear plans, oversight, and customer service funding.
Sen. Bill Cassidy (R-LA) asked about the "family glitch" - why the IRS is now changing what counts as an affordable health care plan under IRS rules. Rettig said that it's a Treasury decision, not an IRS decision. Cassidy asked Rettig if he would support allowing penalty free withdrawals from 401(k) plans automatically on the declaration of a disaster. Rettig said yes.
Sen. Bob Casey (D-PA) thanked the IRS for promoting the expanded child tax credit.
Sen. James Lankford (R-OK) said in past years that getting the e-file confirmation took a day or two, and this year it took seconds. He asked about attrition of IRS employees. Rettig said the attrition rate is about 5 to 11 percent.
Sen. Mark Warner (D-VA) asked about IRS providing documents for Small Business Administration loans.
Sen. Steve Daines (R-MT) asked why the IRS hasn't implemented outstanding recommendations from the U.S. Government Accountability Office and the Treasury Inspector General for Tax Administration. Rettig said they disagree with many of the recommendations, and because Congress approved the IRS budget in March this year and last year, that's not enough time to implement recommendations.
Daines also asked about IRS enforcement against conservation easement donations. Rettig said the IRS is supportive of the goals but syndicated easements are problematic. He characterized these transactions are where people can buy in, save on taxes, and all in less than 3 years. He referenced a previous congressional hearing as to why the IRS is devoting resources to it. (At a time when they are claiming staff shortfalls for customer service, the IRS recently hired 200 new lawyers to conduct 100 percent audit rates in this area.)
Sen. John Thune (R-SD) asked for an update on the leak of taxpayer information to ProPublica. Rettig said that's a question for the Inspector General and that he can't control their timeline. He said security of taxpayer information is among the agency’s top priorities.
Sen. Maggie Hassan (D-NH) asked what she should tell constituents who are waiting on the agency for their Employee Retention Tax Credits. Rettig said they're hiring people and requiring overtime to catch up.
Hassan also asked if the IRS will halt penalties generally until the backlog is cleared, rather than negotiate on an individual basis. Rettig replied that when he was in the private sector he never had problems negotiating with the IRS on penalties.
Hassan also asked how the IRS would use the $310 million it requested for IT upgrades. Rettig said only 16% of IRS systems are outdated. He says they use COBOL programming language and have one of only three people who know it, then added that's not an official response.
Sen. Elizabeth Warren (D-MA) urged the IRS to increase audits of high-income people.
Sen. Catherine Cortez Masto (D-NV) pointed out a letter she sent the IRS asking for an increase in the mileage reimbursement rate due to inflation.
Interestingly, the Commissioner seemed more often to blame funding consistency rather than lack of funding for the agency’s woes, although he did say that any specific customer service basics (answering the phone, accessing accounts on the website) would require additional dedicated funds. He resisted suggestions for saving costs by cutting back on antiquated work practices or misdirected priorities.
As we noted in our written testimony to the committee, the IRS has “serious structural flaws and long-term challenges,” and resists “solidly-grounded guardrails, robust Congressional oversight, and strong taxpayer rights and privacy protections.”