The $80 billion dumped in the lap of the Internal Revenue Service by the Inflation Reduction Act will go a long way to solving some of the problems that besiege the perpetually underfunded agency. And just as people that buy Powerball tickets have a dream of how they might spend their possible winnings, practitioners, politicians and bureaucrats have imagined ways to allocate the funds in effective ways.
Roger Harris, president of Padgett Business services, is one of them. He offered his analysis in a letter to the chairmen and ranking members of the House Ways and Means Committee and the Senate Finance Committee.
"They are looking for suggestions on how the IRS should best implement the Inflation Reduction Act with the money they got. I didn't want to suggest the same things that everyone else has urged — that they should answer the phones sooner, hire more staff, and put more emphasis on training their people."
Instead, Harris delineated some of the recent hurdles the service has faced, and gave recommendations for solving them and avoiding similar problems in the future.
"We have seen firsthand the many challenges faced by the IRS and the resulting negative impact on taxpayers, including massive backlogs, delayed refunds and credits, unanswered telephones, and the sending of inaccurate notices," he said in the letter.
"Like most IRS stakeholders, we believe that the immediate priority for the IRS is fixing these problems. It is incumbent on the IRS to reassure the public that the funds will be spent in an efficient and ethical manner that improves the taxpayer experience and does not increase the burden on American taxpayers. Most Americans want to stay in compliance with their taxes but need an IRS that can respond to their correspondence, answer their phone calls, and process their payments in a timely manner."
He went on to suggest that the IRS should outline its plan on a range of key issues, including:
- Hiring and training new employees;
- Customer service benchmarks;
- Technology enhancements;
- The enforcement selection process, including protections for low-income taxpayers; and,
- Stakeholder engagement (including private sector feedback on enforcement, technology improvements, and customer service tools.
Harris also cited an Oct. 13, 2022, memo from the Treasury Inspector General for Tax Administration that listed these areas as serious management and performance challenges confronting the IRS: protecting taxpayer data and IRS resources, administering tax law changes, and reducing tax fraud and improper payments.
While each of these is important to a well-functioning agency, Harris said that the IRS must fundamentally change the way it addresses potential problems, including working with stakeholders and being willing to adapt and make changes in real time to overcome potential problems in advance, rather than letting narrow decisions snowball into greater challenges.
The implementation of the Employee Retention Tax Credit is an example of a larger administrative problem at the IRS that could have been prevented through early problem-solving, according to Harris.
The ERTC was originally created by the CARES Act, which included a provision that small-business owners could not receive both a Paycheck Protection Program loan and the ERTC. However, that provision was later reversed when the Consolidated Appropriations Act, which Congress passed in December 2020, retroactively allowed a small business to claim the ERTC even if the business had secured a PPP loan. This change opened up the opportunity for hundreds of thousands of businesses to go back and retroactively claim the ERTC for 2020.
"The first critical decision made by the IRS in implementing this policy was that the retroactive credit needed to be claimed on 2020 tax returns, requiring businesses to amend their prior 941s in order to claim the credit," Harris said. "However, amended 941s (941-Xs) can only be filed on paper. There is no electronic option. Therefore, despite the warnings of many tax professionals, the decision by the IRS to not allow businesses to simply claim the retroactive credits on their upcoming quarterly 941 exacerbated an already massive paper backlog at the IRS and led most businesses to have to wait nine to 12 months to receive a credit aimed at helping them weather the pandemic."
"Furthermore, the IRS then provided guidance clarifying that the taxpayer must reduce the wage expense equal to the amount of ERTC credits received in the year the qualifying wages were paid and the credits were claimed," Harris said. "To comply with this guidance, the small-business taxpayers were required to undergo the additional costs and burden of amending their recently filed 2020 income tax return. At the time and since, we have asked the IRS and Congress to take the needed action to give small-business taxpayers the option to amend their 2020 income tax return or include the refunds as income on their 2021 return, removing cumbersome administrative work and additional costs. However, the IRS has taken no action to pursue such a solution."
Although small businesses are finally starting to receive their ERTCs, many practitioners and business owners are under the false impression that once they receive their ERTC money, they are finished with the ERTC process. But in most cases a penalty notice will automatically be generated, since the tax liability will increase and will have been late, Harris observed.
"The history of the ERTC should serve as an example and case study of how failing to proactively address issues as they become apparent will only compound and make existing problems worse for the IRS," said Harris. "If the IRS had been open to stakeholder feedback and shown a degree of flexibility in approaching the implementation of the ERTC, then the massive backlogs and delayed credits could have been avoided."
Harris said he and other stakeholders would like to see an agency that works together with stakeholders to foresee and solve problems before they mushroom into major problems.
"The additional funds provided over the next decade have the potential to vastly improve and even transform the U.S.'s tax administration system for the benefit of taxpayers and tax practitioners," he said. "However, the IRS will fail to achieve its goal of real transformation if it does not implement a strategic plan that promotes a new way of thinking and operating at the agency — one that aims to address problems early and prevent the predictable fallout of bad decisions."
