IRS commissioner to senators: ‘Our efforts are working’

By Paul Bonner

IRS Commissioner Charles Rettig updated members of the Senate Finance Committee Thursday on the Service's performance in the soon-to-be-concluded tax filing season, as well as longer-term assessments of its efforts to modernize its operations, fill staffing gaps, and improve taxpayer service and enforcement.

Asked repeatedly by senators about the IRS's much-publicized backlog of returns from earlier tax years, Rettig reiterated his earlier commitment made to a House subcommittee to, as he put it, "get healthy," with normal processing inventories, by the end of calendar 2022. And he reported seeing progress on that front already.

"Our efforts are working; we're trending in the right direction," Rettig said in response to a question from Sen. Pat Toomey, R-Pa., about reducing the backlog while also improving the level of service on the IRS's toll-free phone lines.

As of March 31 this year, the IRS had 2.3 million returns filed during 2022 that still needed processing, Rettig said. A higher number of returns, 2.7 million, filed in calendar 2021 still also awaited processing on March 31 — generally, ones filed on paper. But the IRS's error resolution function this year appears to be clearing its cases much more quickly, with 741,000 pending cases, less than one-tenth of the 7.7 million in error resolution as of the same point in 2021 — the latter having caused much of the backlog in the first place, Rettig said.

Taxpayer service

In addition, Rettig said in his opening remarks, refunds are going out to taxpayers who e-file as expeditiously as ever. Direct deposits are being made within the generally advised 21 days and often in three or four days, he said.

Paper filings are a different story, however, and the IRS has a practice of handling paper returns on a first-in, first-out basis.

"So, taxpayers who in this filing season choose to file a paper tax return end up at the end of that particular stack," he said.

Handling erroneous 2021 returns more quickly should also allow improved phone response, especially as the IRS's hiring ramps up, Rettig told Toomey.

"During the summer, you'll start seeing the impact of this" as workers freed from accounts management and submission processing are able to fulfill their other duty of answering the phone, Rettig said.

President Joe Biden's recent fiscal 2023 budget calls for funding to staff the phones sufficiently to answer at least 85% of incoming calls, Rettig noted.

"We would like to be at 100%," Rettig said. Realistically, he expects to answer a "meaningful percentage of calls," reflecting a "healthy" taxpayer experience during calendar 2022.

Pressed for what he would call a healthy level of phone service taking all that into account, Rettig cited the IRS's historical target average of about 70%. Currently, it is around 19% to 20%, he said.

But, as with other projections, Rettig said he needed to hedge: Improved service scenarios depend on there not being another significantly severe episode of the COVID-19 pandemic.

Systems modernization

More than one senator questioned Rettig about funding for upgrading the IRS's vintage computer systems and manual conversion of paper returns into electronic data by keypunch operators, and several invoked National Taxpayer Advocate Erin Collins's recent directive to the IRS to take meaningful steps toward helping make paper returns machine-readable by barcoding and using optical character recognition.

Asked why, with funds for improved technology repeatedly budgeted through the years, the IRS has not made more progress toward updating more of its computer systems, Rettig pointed to the fact that much of that funding has come through continuing resolutions, leaving those funds unavailable until well into the fiscal year they cover, which prevents planning for and committing to them.

"It is impossible to build a robust, meaningful, technology infrastructure for any agency, for any private-sector organization, when we don't have consistent, timely, multiyear funding," Rettig told Sen. Tom Carper, D-Del. "We continuously have to push projects off."

Moreover, private businesses' spending on IT modernization enabling customer interactions has dwarfed the Service's, he said when asked about a 2019 six-year plan with funding of between $2.3 billion to $2.7 billion — of which the IRS has so far received 57%.

Two of the largest financial institutions in the nation at that time announced they were spending $12 billion to $14 billion, Rettig said.

"And they interact with fewer people than we do, obviously," he said. "We need more."

Several senators also pushed for further assurances that despite the IRS's pivot away from facial recognition, other security measures for its taxpayer-facing online portals would not still jeopardize taxpayers' personal data.

Staffing

Recent job fairs at the IRS's submission processing and accounts management centers in Kansas City, Mo.; Austin, Texas; and Ogden, Utah, using the IRS's direct-hire authority, have set the Service well along in its goal of hiring 5,000 workers there before year end, Rettig reported. Onboarding is taking between 30 to 45 days, he said. Some workers have been hired on the spot.

Attrition and retirement of existing employees has been about 5% to 7% of the current approximately 80,000 employees, Rettig said, in response to questions by Sen. James Lankford, R-Okla. Rettig noted that the Service had been under a hiring freeze from 2011 to 2018.

"We're not where we need to be, not where you want us to be, but we're getting in a better position every day," Rettig said.

Enforcement

In response to questions by the committee's chair, Sen. Ron Wyden, D-Ore., Rettig agreed that the IRS's estimates of the tax gap, the amount of taxes that the country should be collecting but is not, should be more timely. In 2018, the IRS released its estimate covering 2011 to 2013, and this summer it will release a tax gap reckoning for 2014 to 2016, with projections for 2019, he said.

But the estimates have a worse shortcoming than being several years old, he warned.

"It will, again, not include information with respect to virtual currencies and certain foreign-source income," Rettig said. "We're working to get that information; we're not where we need to be." Virtual currency accounted for $14 trillion in transactions globally last year, he said, an estimated 30% to 40% of it occurring in the United States.

Rettig also signaled his support for a "reciprocal FATCA" bill pending in Congress asked about by Sen. Sheldon Whitehouse, D-R.I., saying that the United States should make good on its promise to other nations now providing taxpayer information under the Foreign Account Tax Compliance Act, P.L. 111-147, to send them similar information in exchange.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

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