Millions of Americans no doubt breathed a sigh of relief Wednesday when the Internal Revenue Service announced that the deadline for filing personal income tax forms for tax year 2020 would be extended by a month, from April 15 to May 17.
But while taxpayers may see an extra month to gather paperwork as a gift, the delay is a function of deep problems at the Internal Revenue Service (IRS), the agency responsible for a growing number of programs essential to the nation’s recovery from the economic downturn caused by the COVID-19 pandemic.
The IRS plays a particularly important role in the American Rescue Plan Act of 2021, the recovery package championed by President Joe Biden, a major part of which involves distributing tax credits in the form of monthly payments to families with children.
The job is unlike any the agency has ever undertaken, and is being stacked on top of a pile of responsibilities that has grown dramatically over the past decade, even as the agency’s staff has dwindled and its funding has been slashed.
Beyond its role in the recovery, the IRS is essential to the functioning of the U.S. government. The agency will take in nearly $4 trillion in revenue this year, money that funds a government overseeing an economy that could top $22 trillion in gross domestic product — the largest in the world.
Decade of neglect
“The IRS has always been asked to do a lot. The tax code is huge, and the number of people who are experts on it is small,” said Janet Holtzblatt, a senior fellow at the Tax Policy Center, a think tank in Washington.
When the COVID-19 pandemic began shutting down the U.S. economy in 2020, the IRS was already reeling from a decade of major budget reductions. In 2010, the agency’s overall budget was $14.9 billion, adjusted for inflation. But by 2019, the year before the pandemic, that number had been slashed by Congress to $11.3 billion, a 24% reduction.
“It’s fair to say it’s not a popular agency,” said Holtzblatt, who previously held senior positions at the Tax Analysis Division of the Congressional Budget Office and the Individual Taxation Division in the U.S. Treasury Office of Tax Analysis.
“I can’t say how much of it is disdain for the IRS,” she said, but noted that the agency’s funding is part of the discretionary spending element of the federal budget, and the IRS “hasn’t been able to compete” with other priorities when lawmakers dole out limited dollars.
It is also notable that much of the reduction in IRS funding came after a 2013 scandal in which Republican members of Congress charged that the agency had singled out conservative groups seeking tax-exempt status for extra scrutiny.
No charges were ever filed, but the Republican-led House Committee on Oversight and Investigations attempted to impeach the IRS commissioner, and years of ensuing investigations made the agency a frequent punching bag for Republican legislators.
Steep personnel cuts
The IRS also was forced to observe a hiring freeze through much of the decade, which helped shrink its core of 95,000 full-time employees in 2010 to 74,000 in 2018.
Because it takes years to fully train IRS personnel, particularly agents and collections officers, the failure to bring new personnel into the system created a serious staffing gap. As experienced officials progressed toward retirement age, the pipeline of younger workers training to replace them began to run dry.
In 2019, IRS Commissioner Charles Rettig warned Congress that the agency had “essentially lost an entire generation of IRS employees” due to the hiring freeze. The agency has estimated that at some point this year, 46.4% of its workforce will be eligible to retire.
Growing burden
Over the past decade, multiple pieces of new legislation affecting tax laws have required more and more from the IRS, even as its budget and workforce declined.
The Affordable Care Act, and the Foreign Account Tax Compliance Act, both signed into law in March of 2010, relied on the IRS for enforcement. The ACA required the IRS to ascertain the health insurance status of all taxpayers and their families, and to create a system for assessing penalties on the uninsured. FATCA required the IRS to create a system to track the foreign financial assets of anyone subject to U.S. tax laws.
In 2015, the Protecting Americans from Tax Hikes Act forced the agency to accelerate the processing of forms reporting workers’ wages — something that was normally done only after tax filing season — so that claims for tax refunds could be verified in advance, rather than in post-hoc audits.
In 2017, the Tax Cuts and Jobs Act required the agency to undertake a major revision to the tax code and the myriad forms the agency produces for taxpayers to use in their filings.
Pandemic relief bills
In the 12 months between March 2020 and March 2021, Congress passed three major pieces of legislation aimed at providing economic relief to Americans struggling under the changes forced on the country by the pandemic.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in March 2020, required the IRS to deliver “Economic Impact Payments” to millions of Americans, in the form of a preemptive credit against 2020 federal income taxes. The second stimulus package, passed in December 2020, included another round of stimulus payments that the IRS was directed to oversee.
The American Rescue Plan, which includes another round of stimulus checks, places a new and unusual burden on the agency. The bill establishes a system under which American families are entitled to between $3,000 and $3,600 in refundable tax credits for every child in a household. The law requires the agency to deliver those payments “periodically,” which is generally understood to mean “monthly,” beginning in July.
This creates a doubly difficult problem for the agency. In addition to setting up a first-ever system to provide monthly payments to millions of Americans, it will also have to create a mechanism for people who may not qualify for the credit because of their income to decline the payment in advance, so they will not be required to pay it back later.
Holtzblatt said she is confident the IRS will be able to get the stimulus checks out in a timely fashion. However, with the tax filing deadline now extended, and reports of a backlog of returns numbering more than 20 million, taxpayers might have to brace for more struggles as the agency tries to fulfill its new responsibilities.
“I'm less certain about their ability to get the advance payment or the child tax credit up and running by July 1,” Holtzblatt said. “I will never say never when it comes to the IRS. They have outperformed expectations so many times. But I think there will be things that will fall through. You will see delays.”
