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Tax Filing Season Challenges Illustrate the Importance of Funding the IRS

By Lily Batchelder, Assistant Secretary for Tax Policy and Natasha Sarin, Deputy Assistant Secretary for Economic Policy

Yesterday, tax filing season began. Over the course of the next several months, the IRS will receive and process around 160 million returns from individuals, and nearly 50 million returns from businesses. It will collect 96% of the total revenue that accrues to the federal government, and it will distribute a wide array of tax benefits to American families.

Administering our system of taxation is a Herculean challenge in normal times. Today, the IRS is not facing normal times. Years of underfunding combined with outdated technology and pandemic-related challenges are going to create a difficult filing season for the American people. This Administration knows that American taxpayers need and deserve better from their tax system.  Though the IRS is focused on doing all it can to alleviate these challenges, addressing them in the long-term will require the funding to rebuild our system of tax administration and ensure that the technology that undergirds the IRS keeps pace with a 21st century economy.

This filing season, there are several steps taxpayers can take to ensure that their returns are processed in a timely manner. Filing electronically and with direct deposit can help avoid delays in processing.  The IRS has made progress in developing tools to assist taxpayers. It has increased the availability of customer callback, doubling the types of taxpayer queries eligible for callback from an IRS agent in advance of this filing season. It is also providing assistance to more taxpayers through automated tools; 46 million additional calls were answered in this manner last filing season.

We know that filing taxes is not as easy as it should be in normal times, and that this year is far from normal. That is why the Biden Administration has developed additional resources for taxpayers, including ChildTaxCredit.gov, which we’re relaunching today. This tool will have several features that help simplify tax filing, directing taxpayers to the best free filing options and helping to determine their eligibility for remaining credits.

Still, some taxpayers will face delays, as the IRS is entering filing season with a backlog of returns and correspondence left to process that is larger than the normal amount of taxpayer returns and correspondence. This is a challenge that compounds, as taxpayers whose returns have not been processed send in additional queries to the IRS.  

This backlog will negatively affect the level of phone service that taxpayers receive, as the same employees who process some returns and taxpayer correspondence also work to assist taxpayers on the phones during filing season. Today, the IRS simply has too few service personnel to meet the extraordinary demand. Phone calls to the IRS more than tripled last year relative to the historic norm. Over the first six months of 2021, the IRS received 200 million calls and had only 15,000 agents to provide assistance, translating to roughly 1 customer service representative for every 13,000 calls.

The only way the IRS will be able to deliver the way the American people deserve is when its funding needs are addressed. Over the past decade, the IRS’s budget decreased 20% in real terms. As a result, the IRS workforce is the same size it was in the 1970s, even though the population has grown by 60% since then.

These issues aren’t about personnel alone. If adequately funded, the IRS could do much more to efficiently process returns and dramatically improve its interactions with taxpayers. (It’s worth noting that today, the IRS is using processing technology that dates back to the 1960s.) Today, about 10% of returns are submitted on paper, often because a necessary form is not available electronically. For a paper return to be processed, it needs to be transcribed by hand.

21st century technology can help make this a more efficient process. Moreover, modernizing the IRS’s information technology would simplify tax filing for taxpayers, facilitating an interactive, real-time experience during filing season, as Americans will be able to monitor the status of their return, correct tax filing information online, and have questions answered instantaneously.  But transitioning to a modern IT system will require a stable funding stream.

Build Back Better provides for this: a much-needed, multi-year stream of funding for the IRS, with nearly $80 billion to the agency to invest in taxpayer service, overhaul technology, and improve the capacity of the IRS to collect owed taxes from wealthy evaders—without increasing audit rates relative to recent years for any taxpayers earning less than $400,000. Because the lost revenue from noncompliance by the wealthy is so substantial—the IRS fails to collect more than $700 billion annually—this investment in the IRS would pay for itself several times over, netting at least $400 billion in revenue to support critical investments in workers, children, and the climate.

Investing in the IRS is imperative to producing a modernized tax administrator that is well-equipped to serve the American people during this filing season—and beyond.