Taxpayers who file their tax returns on paper could face delays of a week or more on their refunds this tax season because of budget cuts, Internal Revenue Service commissioner John Koskinen warned.

In a memo sent to IRS staff on Tuesday, Koskinen offered details on the impact of the recent budget cuts on IRS operations, which he warned would lead to a longer hiring freeze, fewer resources dedicated to customer service, tax enforcement and overtime, and a possible two-day furlough for IRS employees.

The budget cuts will have an impact on taxpayers and preparers.

“People who file paper tax returns could wait an extra week—or possibly longer—to see their refund,” Koskinen wrote. “Taxpayers with errors or questions on their returns that require additional manual review will also face delays.”

Koskinen noted that Congress approved a $10.9 billion budget for the IRS, meaning the agency will have to absorb a cut of $346 million during the remaining nine months of the fiscal year.

“But that really amounts to a total reduction of about $600 million when you count another $250 million in mandated costs and inflation,” he added. “This is the lowest level of funding since 2008, and the lowest since 1998 when inflation is considered.”

He described the various ways that the budget cuts will affect the IRS, including delays to critical IT investments of more than $200 million, which will set back efforts to curb identity theft-related tax fraud.

“This will hurt taxpayer service and cost-efficiency efforts as well as reduce outside contractor support for critical projects,” said Koskinen. “This means that new taxpayer protections against identity theft will be delayed.”

He noted that the Taxpayer Advocate Service at the IRS won’t be able to implement a new case management system to oversee taxpayer hardship cases.

National Taxpayer Advocate Nina Olson, who heads the Taxpayer Advocate Service, delivered her annual report to Congresson Wednesday and commented on the impact of the successive rounds of budget cuts at the IRS (see Taxpayer Advocate Report Highlights Decline in Taxpayer Services, Promotes Taxpayer Bill of Rights). “The budget environment of the last five years has brought about a devastating erosion of taxpayer service, harming taxpayers individually and collectively,” she wrote.

Koskinen noted that aging IT systems will not be replaced at the IRS, increasing the risk of downtime that affects taxpayer service. The IRS will not be able to invest money upfront to gain future operational savings, such as moving to a shared cloud infrastructure and reducing data center space.

Enforcement Cuts
The IRS will also see enforcement cuts of more than $160 million, Koskinen noted. The reduced staffing in enforcement will result in fewer audit and collection cases, including at least 46,000 fewer individual and business audit closures and more than 280,000 fewer Automated Collection System and Field Collection case closures.

“As a result of the hiring freeze, we will lose about 1,800 enforcement personnel through attrition during FY 2015,” Koskinen added. “The reduced enforcement staffing for just FY 2015 means the government will lose at least $2 billion in revenue that otherwise would have been collected.”

He also anticipates cuts in overtime and temporary staff hours of more than $180 million. This will lead to delays in refunds for some taxpayers who file on paper or make errors, with longer delays in correspondence between the IRS and taxpayers, as well as on the phone lines.

“We realize there will be growing inventories in Accounts Management, and taxpayer correspondence will face lengthy delays,” Kosiknen wrote. “Taxpayer service diminished further over the phone and in person. We now anticipate an even lower level of telephone service than before, which raises the real possibility that fewer than half of taxpayers trying to call us will actually reach us. During fiscal year 2014, 64 percent were able to get through. Those who do reach us will face extended wait times that are unacceptable to all of us.”

Olson wrote in her report to Congress about the declines in customer service at the IRS. She said the IRS is unlikely to answer even half the telephone calls it receives, and levels of service may average as low as 43 percent. Taxpayers who manage to get through are expected to wait on hold for 30 minutes on average and considerably longer at peak times. In addition, she pointed out, the IRS will answer far fewer tax-law questions than in past years. 

“During the upcoming filing season, it will not answer any tax-law questions except ‘basic’ ones,” Olson wrote.  “After the filing season, it will not answer any tax-law questions at all, leaving the roughly 15 million taxpayers who file later in the year unable to get answers to their questions by calling or visiting IRS offices.” Tax return preparation assistance has been eliminated, according to Olson.

Hiring Freeze and Furloughs
In his memo to employees, Koskinen said the IRS will extend its hiring freeze through FY 2015. “As a result of the hiring freeze and assuming normal attrition rates, we expect to lose between 3,000 and 4,000 additional full-time employees,” he wrote. “The total reduction in full-time staffing between FY 2010 and FY 2015 is expected to be between 16,000 and 17,000.”

Koskinen said the IRS has tried to protect critical areas as much as it could during the process of assessing the impact of the budget cuts. “We will still work to deliver as smooth a filing season as possible,” he said. “We will maintain IT systems critical to the filing season and tax enforcement. This commitment also includes providing appropriate training and technology support for you and your colleagues to help you do your job.”

However, even with all of the anticipated reductions, he warned, the IRS still faces a remaining budget shortfall and may need to shut down for two days later this year after tax season and furlough IRS employees.

“Unfortunately, this means at this time we need to plan for the possibility of a shutdown of IRS operations for two days later this fiscal year, which will involve furloughing employees on those days,” said Koskinen.

He said the IRS plans to work with the National Treasury Employees Union on this possibility, and will fulfill the IRS’s bargaining obligations with the NTEU.

Responding to the National Taxpayer Advocate report on Wednesday, NTEU national president Colleen M. Kelley said. “The nation, along with the IRS workforce, is suffering from the $1.2 billion worth of budget cuts the IRS has endured since fiscal year 2010. It is appalling to me that only half of the callers will be able to get through to a customer service representative during this filing season, that Taxpayer Assistance Centers will be forced to turn people away and that millions of people who file paper returns will see their refunds delayed.”

“This is an area of major concern for me and the entire IRS leadership team,” said Koskinen. “Shutting down the IRS will be a last resort, but I want to be upfront with you about the problem. I know even a day’s worth of pay makes a huge difference in household budgets and family situations. While we will continue to do the best we can to avoid this action, the cuts in the budget are so deep that we may have no other choice.”

He added that if a furlough becomes necessary, the goal will be to minimize disruption to employees and IRS operations as well as taxpayers and the tax professional community. “The timing for these dates would be late in the fiscal year, so between now and then we can do everything possible to avoid them,” he wrote.  

Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, said the IRS should receive more funding from Congress. “Recent comments from IRS Commissioner John Koskinen paint a grave picture for American taxpayers as filing season begins this year,” he said in a statement Wednesday. “Due to hundreds of millions of dollars in budget cuts at the IRS, taxpayers will not receive the level of service they deserve and expect. Beyond a lack of resources to handle the large volumes of phone calls and letters the agency receives each year, every dollar cut from enforcement is seven dollars in taxpayer money lost, which means budget cuts benefit tax cheats at the expense of hardworking American families who pay their fair share. If Congress continues to underfund the IRS, taxpayers will lose as they try to navigate the outrageously complex U.S. tax code with minimal or inadequate guidance. It’s clear the tax system needs to be reformed, but cutting funds for enforcement activities and personnel to answer calls from taxpayers is not the way to fix the problem. To have a functional tax system, it is critical Congress gives the IRS the support it needs to fulfill its duty to taxpayers.”

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