Article Authored By Beckett Cantley and Geoffrey Dietrich
As of early January 2022, President Biden’s massive $1.8+trillion “Build Back Better” Bill (“BBB”) was declared dead as a single piece of legislation. While barely passing through the House of Representatives in a 220-213 vote in November, the President’s multiple trips to Capitol Hill and threats across the Senate by various leaders were unable to sway Sen. Joe Manchin (D-WVa.) to vote for the BBB. Sen. Manchin’s vote was necessary to have the BBB Senate vote reach 50-50, which would have allowed Vice President Harris to break the tie. Tucked away inside every version of the BBB was an $80 billion budgetary increase over ten years for the IRS. Every year, the bureaucracy most despised by the American taxpayer would receive an additional $8 billion in funding.
The Starvation of the IRS
The IRS has been in a budgetary drought for over a decade. The IRS budget absorbed a twenty percent (20%) cut (adjusting for inflation) since 2010. IRS funding has not been increased at a proportionate rate to keep up with even then-moderate inflation, much less the inflation we are seeing today.
In its’ report to Congress, the Taxpayer Advocate Service listed the “most serious problems encountered by Taxpayers” in dealing with the IRS. Said problems included but were not limited to: (1) processing and refund delays; (2) lack of sufficient and highly trained employees; (3) significant challenges reaching an IRS representative for either telephone or in-person services; and (4) lack of proactive transparency (See 2021 Annual Report to Congress, Taxpayer Advocate Service (January 2022)).
The individual income tax return filing season began January 24 and ends April 18, with neither Treasury nor the IRS having any illusion it will go smoothly. There are no plans to extend the return filing closing date at this time, Treasury officials said on a January 10 call with reporters. Going into it, the administration is anticipating challenges.
A preexisting backlog of tax returns, with millions more in unprocessed returns than in years past, combined with staffing and logistical challenges, are expected to make for an especially frustrating filing season this year for both taxpayers and tax professionals, the officials said. That means that the IRS simply doesn’t have enough resources to provide adequate service or enforcement, they said.
(See Treasury, IRS Set Filing Season Kickoff for January 24, Tax Notes (January 11, 2022)).
This backlog is, in a good year, approximately 1-2 million returns. Not an insignificant number by any calculus, but going into 2022, there are nearly 35 million unprocessed returns. That is an astounding figure. While recognizing that not every American will file a return, that number does represent ten percent (10%) of the population of America if every person filed a return. What that really represents is a catastrophic backlog of returns that will likely never see the light of day. To ease the process for both taxpayers and the IRS, officials advised taxpayers to avoid paper if possible, recommending that they file tax returns electronically and use direct deposit or pay taxes owed electronically.
Overall, tax practitioner patience is running out while taxpayer anxiety is growing. President of Padgett Business Services, Roger Harris, remarked, “The excuse of COVID is about to run out [for lagging IRS services]. It’s already run out for a lot of people.” Like the rest of the federal government, the IRS is operating on a continuing resolution which delays programs and improvements until the middle of the agency’s fiscal year (See A Look Ahead: In Battle of Wills, Will Congress Fund? Will IRS Reform?, Tax Notes (Dec. 27, 2021)). So, without any new funding and operating on last year’s budget, no change will really be possible until at least February, a less than ideal time to throw new agents, phone representatives, and auditors into the fire.
IRS Facing Off with an Angry Congress
As far back as 2019, the IRS has struggled with its optics. A ProPublica report released May 30, 2019, found that the IRS audits the poorest Americans at approximately the same rate as the top 1% income earners (See Paul Kiel, It’s Getting Worse: The IRS Now Audits Poor Americans at About the Same Rate as the Top 1%). Recipients of the Earned Income Tax Credit (“EITC”) were audited at a higher rate than all but the richest taxpayers.
The most likely driver for auditing EITC issues is the ease of execution. Audits of EITC recipients are largely automated and less complicated. Conversely, the wealthiest Americans—think the billionaires we love to malign in the media—have teams of accountants and money managers that require a team of trained investigators to understand and attack the structures and documentation. Every year, the IRS loses its trained auditors to retirement. When subject matter experts disappear from the ranks, they are rarely replaced by similarly qualified persons. These complicated audits require individual attention and in-person meetings—something the IRS is currently ill-equipped to handle.
Adding to the scrutiny, taxpayers have increasingly turned to their representatives in the House and Senate for assistance solving problems with the IRS. From 2017-2019, members of Congress requested assistance from the Taxpayer Advocate approximately 10,000 times in a year. In 2021, that number was 66,453 (See Lawmakers Report Surge in Requests for Help With Unresponsive IRS, Tax Notes (January 14, 2021). A smaller work force, underfunded and technologically behind, dealing with six times as many calls just to the Taxpayer Advocate. There were nearly 140 million calls to the IRS itself in 2021.
In typical political fashion, each political party is blaming someone on the other side of the aisle for the problems faced today. Congressional Republicans have sent a letter to Commissioner of the IRS Chuck Rettig noting that righting the ship of the agency may require “significant tradeoffs” to “meaningfully reduce the backlog” (See House Ways & Means Committee, Letter to Commissioner Rettig (January 19, 2022)). Further advising that the service should take an “all hands on deck” approach to minimize the backlog and prepare for the current year’s filing season. They also note that, despite the pleas of poverty, the IRS received over $1.4 billion in unobligated supplementary funds from Congress in 2021.
Possibility of a BBB Revival?
It appears that the Biden administration is still seeking to enact a few provisions from the BBB, even though the larger BBB proposed legislation has been defeated. On a January 25 2022 virtual meeting of the N.Y. State Bar Association Tax Section, Treasury Assistant Secretary for Tax Policy Lily Batchelder said the $80 billion boost in IRS funding over ten (10) years is among the items intended to be resurrected. “The administration’s Build Back Better package has faced many twists and turns in its path to enactment,” Batchelder acknowledged. “Having worked in Congress, I can say this is true of every major — and minor — piece of legislation” (See Hope Springs Eternal for Some of Biden’s Tax Priorities, Tax Notes (January 26, 2022)). Batchelder previously served as chief tax counsel for the Senate Finance Committee from 2010 through 2014. He stated that the Biden Administration remains “confident that many of the top priorities will ultimately be enacted,” including the increase in IRS funding.
House Majority Leader Steny H. Hoyer (D-Md.) has also sounded upbeat on passage of some of the items, saying in a January 25 live interview with Politico that “[y]ou pass what you can pass, and then in future years, future Congresses, you try to improve. And so I’m optimistic that we’re going to pass a significant, very positive for the American people, Build Back Better bill”. Jorge E. Castro of Miller & Chevalier Chtd., a former House and Senate Democratic tax staffer, told Tax Notes that he thinks a robust BBB package still has a possibility of enactment this year, but the next few weeks will be critical.
Whatever is included in a scaled back BBB will ultimately be determined by moderate members of the House and Senate, Castro said. Lawmakers like Sens. Joe Manchin III (D-W.Va.) and Kyrsten Sinema (D-Ariz.) have shown at least some willingness to support revenue-raising proposals, suggesting IRS funding reforms remain on the table, he added. Still, the IRS funding provision is intended to offset the BBB spending provisions, Castro continued. “Whatever those spending provisions are, I think that’s going to determine what the scope of the revenue raisers is going to be,” he said.
That being said, 2022 is an election year. The likelihood is small that the Democratic majority in the House and their effective control of the Senate will remain after the 2022 elections. President Biden’s unpopularity continues to plummet, so he will be of little assistance to his congressional allies. Passing pro-IRS legislation is difficult when a political party is popular, but undertaking it in this environment may be devastating to congressional Democrat Party members running in red and purple states. Recently, Democrat Party members released press statements desperately requesting their retiring members continue to work on the Biden Administration agenda. We will see how effective these requests are to Democrat Party members who may be looking for new employment in 2023.
Tea Leaves. Divining the Unknowable.
Here we gaze into the hazy crystal ball of the future, pour out the tea and divine meaning from the leaves left, and shake our chicken bones and cast them on ground searching for answers. We begin with what we know:
- The IRS has been tragically underfunded for over a decade and, despite cash infusions, pleads continual poverty.
- During this same season, more than 17% of the IRS workforce has retired or left for other pastures and hiring is down due to a weak job market and lack of applicants.
- The hoped-for $80 billion of BBB money meant to rescue the IRS may not materialize.
- There are at least 16 million individual returns outstanding and a similar number of business
- The Service faces increasingly antagonistic requests from Congress regarding: (1) customer service; (2) failures to provide accurate tax processing to the lowest income brackets who—historically—rely most on tax refunds; and (3) aggressive stances toward audits of wealthy individuals while a historically large backlog prevent even basic services.
What does this mean? What do the tea leaves tell us? As is often the case with divination, we may see what we want to see. We may also guess completely wrong. With those carefully laid disclaimers, we think that if no BBB money is forthcoming, continued pressures from Congress will likely divert new hires away from audit and toward basic customer service positions like telephone assistance and processing. Typically, one supervisor is needed for four telephone agents. The IRS will likely have to triage and with new hires have a 1:8 ratio or greater. This could result in slower outcomes or mistakes but should increase the available agents to take calls and at least ease some of the burden.
There is a distinct possibility things get worse before they get better. Could the IRS put a “pin” in prior tax years and just set sights on the future? While possible, certain tax years or risks or demographics may find themselves “outside” any silo shutting down prior tax years. The IRS will need significant work and transparency in any determination to reduce or even delay collections activity. Some of these possibilities may result in more paperwork, filings, requests, and delay than just pulling on the big kid boots and mucking through.
 IRS Letter to Senator Elizabeth Warren, August 27, 2021, pp. 10-11.