The acting Internal Revenue Service commissioner warned this week that up to two thirds of all U.S. taxpayers will be forced to file late returns next year if fiscal cliff negotiations fall through – another major headache for taxpayers and an agency already struggling to handle growing administrative responsibilities with a shrinking staff.
Steven Miller, the acting IRS chief, revealed in a letter to the top House and Senate tax writers from both parties on Wednesday that between 80 million and 100 million taxpayers won’t be able to file on time if President Obama and House Speaker John Boehner fail to reach agreement on a plan for extending Bush-era tax cuts next year and sparing 30 million Americans from the effects of an alternative minimum tax designed to prevent wealthy people from evading taxes.
Miller said the IRS has programmed its computers to assume that Congress will agree to a last-minute AMT relief or “patch,” as it has in previous years. But if the White House and Congress can’t reach an agreement on taxes this month, Miller said that millions of Americans will have to wait for the IRS to alter its computer programs. “If an AMT patch is not enacted by the end of this year, the IRS would need to make significant programming changes to conform our systems to reflect the expiration of the patch,” Miller wrote.
Many taxpayers depend on the money they receive from tax refunds, and the delay could impact consumer spending. In the first quarter of 2012, the IRS sent out $212.8 billion in refunds to 75.3 million taxpayers, with an average of $2,826 per check. Already, the first day to efile in 2013 isn’t until January 22, about a week later than in recent years, and according to Miller, this might be delayed until the end of March for most taxpayers. The delay could prevent billions in refunds from entering the economy in the first quarter of 2013.
The IRS has weathered a series of embarrassing administrative snafus and tough budget cutbacks that have forced the agency to do considerably more work with fewer resources. Apart from its concerns about what might happen if no deal is reached on taxes this month, questions abound about the IRS’s ability to face down a different challenge next year: implementing key tax provisions of the Affordable Care Act.
The IRS maintains that it is fully prepared to manage a spate of new taxes and tax credits adopted as part of the health care overhaul as incentives for uninsured Americans to obtain health coverage under the new program. But experts worry that the agency’s mounting record of fraud and erroneous payments bodes ill for its ability to execute this vastly complex social program.
The IRS has already issued over 200 pages of guidance on the new health care-related taxes that take effect in January: Those include an additional 0.9 percent payroll tax; a 3.8 percent investment tax on interest, dividends and capital gains; and a 2.3 percent tax on certain medical devices. But experts agree that the real challenge for the IRS is yet to come.
Once the levies go into effect, IRS will face new challenges in enforcing the law and managing tax credits to help individuals and businesses pay for insurance, said American University’s David Kautter, an executive-in-residence in the Department of Accounting and Taxation. Starting in 2014, the IRS will be tasked with collecting information to determine whether workers who cannot afford to purchase insurance on their own are entitled to federal assistance in the form of a tax credit. The IRS is also charged with extracting penalties from individuals who fail to purchase insurance and from businesses that fail to provide insurance to their employees.
Although Miller said in a September hearing that the agency is “absolutely” ready to begin administering the health care law, experts argue that these tasks unduly expand the IRS’s role in the welfare state.
Scott Hodge, the president of the Tax Foundation, contends that the ACA effectively makes the IRS an extension of the Department of Health and Human Services -- a function IRS is not designed to perform. The ACA gives HHS the authority to make the rules, Hodge said in written testimony before the House Ways and Means oversight subcommittees in September, while saddling the IRS with the burden of collecting the information, policing the system, and fixing its problems.
“I think the bottom line is [the IRS] will be subject to a tremendous amount of improper payments, fraud, and lack of accountability,” Hodge said in an interview. “The solution is not to give the IRS more money and more manpower, it’s to take responsibilities off its shoulders so that it can focus on what its core mission is, and that’s simply to collect revenues, not manage social programs.”
The IRS has been ill-equipped to manage such social programs in the past, experts say.
In its latest report to Congress, the Taxpayer Advocate Service noted that despite a huge expansion of the IRS’s workload over the past few decades, Congress has repeatedly reduced the IRS’s funding and staff.
The IRS’s budget was reduced from $12.1 billion in fiscal 2011 to an estimated $11.8 billion in fiscal 2012, according to budget documents. Meanwhile, the IRS now has fewer than 91,000 employees to process over 236 million tax returns, according to Colleen Kelley, president of the National Treasury Employees Union. By comparison, in 1995, the IRS had a staff of just over 114,000 to process 205 million returns. The IRS could feel an additional budget pinch if Congress allows scheduled across the board spending cuts – known as sequestration – to take effect in January.
The substantial increase in the IRS’s workload and its diminished budget resources have coincided with a significant increase in fraudulent tax refund schemes, erroneous payments and identity theft. The IRS has identified more than 404,000 taxpayers who have been affected by identity theft since 2008, the Taxpayer Advocate Service reported, and the agency is receiving an increasing number of fraudulent tax returns claiming refunds. In calendar year 2011 alone the IRS flagged 1,054,704 returns for further review, an increase of 72 percent over calendar year 2010.
The Earned Income Tax Credit, arguably the agency’s tax credit program most vulnerable to abuse, is often compared to the ACA’s premium tax credit. The EITC, a refundable federal income tax credit for low to moderate-income workers, is the IRS’s largest tax credit program and reportedly has the second-highest amount of improper payments after Medicaid. Hodge wrote that 23 to 28 percent of EITC payments are issued incorrectly each year, leading to $11 billion to $13 billion in erroneous EITC payments.
Experts worry that these kinds of errors may proliferate in 2014.
“Despite the IG’s recent report suggesting that the IRS’s plans to implement the ACA appear ‘adequate,’” Hodge wrote, “the vast number of problems the IRS is already having should give us great concern over its ability to skillfully manage the ACA.”
Gene Steuerle of the Urban Institute, also expressed doubt that an overburdened IRS will be able to administer the ACA’s taxes and credits without errors. Steuerle said the agency will likely spend the next several years attempting to modify the system to make it more “workable.”
“We’re adding on a fairly extensive health, welfare and tax system,” said Steuerle of the ACA. “There are all sorts of kinks and administration problems, and some stuff that might just not be administrable at all… We are going to be discussing this for a long time to come.”