Efforts to mandate new information reporting requirements will fall flat if the IRS isn’t also given funding to develop technology to sift through the mounds of data, according to the IRS chief.
“We need funding for that; otherwise, you’re just building a bigger haystack to be out in the yard, and by themselves, those haystacks aren’t helpful,” IRS Commissioner Charles Rettig said during an April 13 interview with Tax Analysts President and CEO Cara Griffith.
Rettig pointed to the IRS’s recent experience with the Foreign Account Tax Compliance Act, in which the IRS implemented a new information reporting regime, but it wasn’t concurrently given funding to handle the new data coming in. A recent Treasury Inspector General for Tax Administration report found that the revenue the IRS was anticipated to raise through FATCA fell well short of projections.
The IRS has been waiting for funding to put technology to work under FATCA, but in the meantime, its technology budget has been allocated to other, more visible items, Rettig said.
The IRS would also need funding to train its employees, Rettig continued. “We need to go to the right place with the right people who are trained, who ask the right questions, know the right answers,” he said.
The IRS already uses artificial intelligence to select about half of its small business audits, and within the next two to three years, that will likely increase to 100 percent, according to Rettig. Funding would allow the IRS to develop technologies like AI to help the agency identify who should — or shouldn’t — be audited, he said.
That’s not to say more information reporting wouldn’t be helpful in some capacity, Rettig said, noting that the vast majority of returns that have taxes withheld and include information reporting are accurate, whereas without those, compliance drops below 50 percent. Information reporting would, by itself, also likely have at least some deterrent effect against tax evasion, but that doesn’t mean taxpayers should be burdened just for the sake of a deterrent, he added.
“So information reporting, overall, is a big help for tax administration, but it needs to be channeled. It needs to be appropriate, and it’s not fair to burden taxpayers in that space, particularly if it’s space that the IRS can’t use,” Rettig said.
Rettig suggested that further information reporting on virtual currency transactions would be particularly useful, arguing that the Justice Department’s John Doe summons has demonstrated that there is substantial underreporting in that area.
Many taxpayers have indicated that they are unsure of their tax obligations when it comes to cryptocurrencies, and to that, Rettig said taxpayers should look to this year’s Form 1040, which prominently features a question on cryptocurrency transactions. “We moved it from three pages back to right under the signature line for a reason. Read into it,” he said.
Mail Crush
The IRS commissioner repeated his promise to have the agency’s much-lamented backlog of unprocessed mail and tax returns cleared by the end of this year, and he said the IRS has made progress in that direction, citing a new round of statistics.
“We are looking to . . . crush this inventory as soon as possible,” Rettig declared.
The IRS’s biggest success story on that front is its handling of unprocessed mail: “Mail is something we have, if you will, overcome,” Rettig said. The agency had 23 million unopened pieces of mail in mid-2020, and this week, the IRS was down to just 381,000 pieces. “That’s current,” he said.
The IRS has about 2.4 million unprocessed paper individual income tax returns remaining from last year’s filing season, down from about 10 million at the beginning of the year, Rettig said, plus another 2.5 million paper returns received so far in this year’s filing season. The latter aren’t out of date, he noted.
The IRS is also making progress on processing 2.6 million amended returns, 1.4 million of which are in the submissions processing unit, which generally handles simpler returns, while the remainder are in the accounts management unit, Rettig said. However, the IRS will soon shift a large portion of the amended returns to accounts management, because the unit has been “well ahead of the curve” in processing Forms 1040-X, he said, adding, “We’re trending in a really positive direction.”
In addition to the surge team of reassigned IRS employees directed to process mail, the agency has implemented mandatory and voluntary overtime, Rettig said. It has helped that the volume of calls the IRS has had to handle this filing season is “far below our projections,” freeing up employees to focus on processing mail and returns, he noted.
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