Years of financial and administrative neglect by Congress coupled with the devastating impacts of COVID-19 and new responsibilities have sent the Internal Revenue Service spiraling into chaos.
The troubles translate into difficulty in processing refunds quickly, auditing returns to catch cheating, and a lack of services to help Americans troubleshoot their filings. The result is lost revenue for the federal government, which depends on the money it collects—more than $4 trillion in fiscal year 2021—to fund everything from the U.S. military to national parks.
From 2010 to 2019, Congress reduced the IRS budget from $14.6 billion to $11.5 billion, and its staff dropped from 94,000 employees to 73,000, according to Congressional Budget Office estimates. The tax gap, or the difference between what people pay in taxes and what they owe, has also grown significantly to as much as $1 trillion, IRS Commissioner Charles Rettig recently told Congress.
The agency has been “outgunned” by sophisticated tax avoidance schemes, he said. Much of this outgunning comes from the wealthiest 1% of Americans, who skip on $163 billion in tax bills annually. Over 25% of unpaid taxes come from the top 1% of earners, and more than 20% comes from just the top 0.5%, according to a Treasury Department report.
“Currently, an under-staffed IRS, with outdated technology, is unable to collect 15% of taxes that are owed, and a lack of resources means that audit rates have fallen across the board, but they’ve decreased more in the last decade for high earners than for Earned Income Tax Credit recipients,” wrote Natasha Sarin, the deputy assistant secretary for economic policy at Treasury and the report’s author.
Problems may soon get worse as the agency struggles to attract young talent. About 5,600 employees leave the IRS annually for another job. When those numbers are added to the number of employees who eligible to retire in 2022, about 32% of the current IRS workforce could leave the agency this year.
Already, only one of every 50 calls to the IRS help hotline are answered. Meanwhile, the backlog of unprocessed returns is growing. The agency is still grappling with more than 9.6 million unprocessed paper returns from 2021, another 5 million paper and e-file ones have been suspended because of an error and still need attention. And the agency’s computer systems, at over 60 years old, are among the oldest in the federal government.
All of these difficulties coincide with new pandemic-relief efforts, like issuing child tax credits and economic impact payments, that have been added to the service’s already-full roster of duties.
“That converges with the pandemic itself…All those things come together and put the IRS in a difficult place. Everybody who is a [tax professional] is concerned about this filing season because the service still hasn’t dug itself out of the last filing season. It’s a problem,” Mark W. Everson, IRS Commissioner under George W. Bush and current vice chairman at tax consulting services firm alliantgroup, told Fortune.
President Joe Biden has advocated for $80 billion in additional funding for the IRS as part of the Build Back Better budget package. But that bill is stalled, and any help it would now bring won’t be in place for the current filing season.
Pinar Cebi Wilber, chief economist of the pro-business think tank American Council for Capital Formation, did sound a note of optimism with Fortune in saying this season will likely be somewhat better than previous ones during COVID, in 2020 and 2021. Hopefully, she said, more staff will be on hand and healthy, though she warned that the Omicron variant could change that.
There’s a silver lining to the IRS and the crisis it faces under COVID, said Wilber: The agency’s problems got so bad recently that employees started to speak out publicly and to the media, making it difficult for Congress to ignore the problems they described.
But not everyone is so positive. Everson, the former IRS Commissioner, said: “I don’t think this issue has been looked at adequately by Congress. More people deal with the IRS than with the Army or the Navy. It is a symbol of how our government is functioning because so many people rely on it and interact with it and it is not working correctly.”
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