Democrats in Congress seem to believe that the IRS is a Swiss Army knife — a malleable tool that can quickly bend, twist and conform to their beck and call. In 2012, they called on the IRS to administer a health care law under the Affordable Care Act. Since then, the IRS has dedicated resources to confirming whether individuals have obtained required coverage, qualify for a series of exemptions with varying levels of complexity, and/or qualify for subsidy based on income. Up until 2018, the IRS also administered a penalty for noncompliance with the individual mandate.
In reality, the IRS is among the most underfunded and thinly stretched administrative arms of the federal government. The easiest way to see this for yourself is to call the IRS’s general tax support line: (800) 829-1040. In a pre-pandemic setting, you should have planned to be on hold for at least an hour, but depending on the time of day, it could be two or three. There was about a 30% chance that even after waiting on hold for an extended period, you would be subject to a frustrating and ironically discourteous “courtesy disconnect,” asking you to call back at another time.
The pandemic seems to have only exacerbated the IRS’s inability to provide basic customer service. The Washington Post reported that in the month of January, IRS employees answered only 9% of calls placed.
This, though, is really just a symptom of a much bigger problem. Since the recession era, beginning in 2010, the IRS has faced dramatic budget cuts due to reduced funding. This has led to declines in human and physical capital. The IRS’s IT systems are comically out of date. Enforcement budgets, including those associated with audit personnel, have been massively depleted. In other words, it is not an overstatement to say that the IRS is ill-equipped to administer and enforce even the fundamental tax laws of the United States, let alone special purpose legislation that Congress throws in its lap when political winds gather in one direction.
Yet with the president’s signature, the American Rescue Plan Act (ARPA) of 2021 became law and spent $1.9 trillion in the name of COVID-19 relief. Under the legislation’s provisions, Democrats expect the IRS to take on yet another role: federal social benefits administrator.
This is not an entirely novel concept to the IRS. For many years, it has administered the earned income credit, a credit available to taxpayers who have some but not too much income. Social welfare implications abound, along with opportunities for misrepresentation, but, though far from perfect, administration of the credit has been improved and refined over many years to lessen abuse.
Under ARPA, Congress has installed a massive welfare benefits program and unrealistically expects the IRS to be ready to administer it by July. The IRS must establish a program to make “temporary advance payments” of the enhanced child tax credit to eligible taxpayers equal to 50% of the taxpayer’s available child tax credit for 2021, from July to December. Former national taxpayer advocate Nina Olson has suggested that current IRS systems are simply not equipped to handle this type of program.
ARPA grants the IRS additional funding, but even if it were enough to make up the shortfall a decade in the making (it probably isn’t), just over 31⁄2 months is hardly enough time to overhaul systems and hire/train personnel to run them. All this is to suggest that in its haste, Congress has established a program that the IRS is incapable of administering well. The question will not be whether, but how many millions of dollars are wasted in misappropriated payments due to the IRS’s inability to process information or detect misrepresentation or fraud.
We have seen the result when Congress places urgency over enforcement and administrative feasibility and unreasonably expects the IRS to make up the difference. To counteract the slumping housing market during the recession, Congress created the first-time homebuyer tax credit, a credit of $7,500 (2008) or $8,000 (2009/10) to qualified individuals. To inject “relief” as quickly as possible into the housing market, the refundable credit could be obtained with little more than filing a form with the IRS. Not so much as a HUD statement was required.
The Treasury Inspector General for Tax Administration (a government organization whose purpose is to prevent and detect fraud, waste and abuse within the IRS) found that the credit was erroneously given to over 14,000 individuals, amounting to erroneous credits of at least $26 million. Within that group were 67 taxpayers who used the same home to claim the credit and 241 prisoners serving life sentences at the time they claimed that they bought their new residence. It should be interesting (and distressing) to see what the treasury inspector general finds when the dust settles this time around.
Eric Smith is a tax professor and associate dean in the Goddard School of Business & Economics at Weber State University, and is of counsel to Dentons Durham Jones Pinegar.