Congressional Democrats and Republicans split along familiar lines during an oversight hearing over whether the IRS deserves more funding or needs to do better with what it has.
“The IRS has done less to enforce tax laws because it can’t,” said Rep. Gerald E. Connolly, D-Va., chair of the House Oversight and Reform Government Operations Subcommittee, during an October 7 hearing on the tax agency’s response to the coronavirus pandemic.
The IRS has absorbed a 20 percent reduction in funding over the last decade, with a 22 percent reduction in overall staff, 30 percent of which were in enforcement, Connolly said. “The IRS’s operational challenges did not happen overnight,” he noted. “This does not sound like an agency ready to fully serve the American people during a pandemic.”
But subcommittee ranking member Jody B. Hice, R-Ga., challenged witnesses’ and Democrats’ claims of the “IRS starving in terms of funds.”
According to Hice, the IRS’s fiscal 2010 “watermark” budget resulted in agency employees attending what he called lavish conventions and “ridiculous videos” being made with an anti-conservative spin, as well as accusations surfacing in 2013 that exempt organizations staff targeted conservative groups’ exempt status.
Hice noted that the IRS currently spends about 80 percent of its $3 billion IT budget on maintenance of old systems rather than investing in new ones. “In spite of repeated large investments by Congress . . . the IRS continues to drag on and seemingly never reach completion of modernization,” he said.
‘Brave Face’
IRS Commissioner Charles Rettig responded that the agency’s coronavirus emergency “response serves to illustrate how important it is that the agency receives consistent, timely, and adequate multiyear funding” to continue providing services throughout the pandemic.
Rettig also cited a June Treasury Inspector General for Tax Administration report that found the IRS correctly computed approximately 98 percent of economic impact payments under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136).
Rep. John P. Sarbanes, D-Md., credited Rettig for “certainly putting a brave face on, in view of these dramatic cuts that the IRS has experienced over a period of years now. The [budget] numbers are breathtaking.”
Sarbanes said increased IRS funding should be “a number one priority for Congress, and I think it ought to be a priority of any administration.”
Who Gets Enforced?
Sarbanes and other congressional Democrats complained that a decade of IRS budget cuts had impaired the agency’s auditing capacity, and the potential to close an estimated $441 billion annual tax gap between what taxpayers owe and what the IRS collects. Connolly cited a University of Pennsylvania study estimating that the IRS would fail to collect up to $7.5 trillion over the next decade, but could collect $1 trillion of that by beefing up its audit and oversight capacity, especially on high earners.
Rettig emphatically denied a ProPublica report from last year that claimed he told lawmakers that the IRS audited earned income tax credit recipients more than high-income filers because the poor had easier audits.
“That report is absolutely false,” Rettig said. The IRS data book for 2019 showed that returns with adjusted gross income of $10 million or more were audited at 8.16 percent, while EITC claimants returns were audited 1.129 percent of the time, he noted.
Rettig also pushed back on House Ways and Means Oversight Subcommittee Chair Bill Pascrell Jr., D-N.J., who asked the commissioner to fulfill his committee’s 547-days-old request to turn over President Trump’s tax records.
“It’s not appropriate for me to discuss pending litigation,” Rettig said.
IRS Collection Bounties?
Rep. Gary J. Palmer, R-Ala., said he will propose legislation that amends the Payment Integrity Information Act (P.L. 116-117) to allow federal agencies to keep a portion of improper payments they recover, which, in the IRS’s case, could be used to beef up enforcement.
Rettig said the IRS was all in on a congressionally sanctioned improper payment sharing plan. He noted that the agency faces a $17-billion-per-year improper EITC payment problem, despite only 2 percent of those returns being flagged for review.
Meanwhile, subcommittee Republicans complained about $1.4 billion in economic impact payments being sent to dead people and the incarcerated, and long delays for millions of taxpayers awaiting 2020 refunds and stimulus checks.
But Vijay A. D’Souza, the Government Accountability Office’s director of information technology and cybersecurity, said that legacy IT systems were a limited factor in the IRS’s payment distribution system.
“Any of the issues we’ve talked about related to the payments had more to do with the policy and procedural issues versus the underlying technology,” D’Souza said. Getting nonfilers to the IRS online portal — for which the IRS just extended its deadline from October 15 to November 21 — is the major remaining economic impact payment distribution challenge, he added.
Inventory Requested
Connolly said his subcommittee will ask the GAO for a comprehensive list of IRS IT assets, hardware, and software, their ages, online capabilities, and cost estimates to upgrade or replace systems.
The IRS is working on two complementary IT modernization plans, Rettig told the subcommittee. The first, announced in April 2019, calls for a six-year funding plan from Congress. The second is contained in parts of the Taxpayer First Act. Neither plan has been funded by Congress, but “we need both,” he noted.
Many IRS systems are beyond their useful life, which in some cases are extended by warranties, Rettig said.
The IRS also needs to replace the 1960s-era COBOL software that runs critical systems such as the individual master file, Rettig said. D’Souza noted that attempts to calculate the replacement costs and time for such a project haven’t yet produced an estimate.
Rettig touted other agency initiatives he said could produce additional revenue, such as the availability of tax agency translators in more than 350 languages.
A 1 percent increase in the 83 percent voluntary tax compliance rate would bring in $35 billion annually, Rettig said. “That’s $35 billion a year from Americans who want to get it right, who are proud to be Americans, who are proud to file tax returns,” he continued. “And there are a lot of people there.”
“Modernization helps us significantly” in regard to tax collections, Rettig said. “It also helps in the enforcement component. We welcome the assistance of Congress.”