Part I: What I Worry About When I Think About the IRS and the CARES Act

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In today’s post Contributor Nina Olson offers the first of a two-part post on the CARES Act.

In his memoir of his time as Commissioner, Many Unhappy Returns, Charles Rossotti recounts the evening of July 3, 2001, on which he was advised there was a “bug in the program” resulting in some erroneous computations of the special refund checks that 90 million taxpayers were expecting.  “No one could tell what the delay might be until we could find the problem and fix it in the ancient computer codes of the IRS master file.”  He continues:

The problem showed, only too obviously, the frightening vulnerability caused by the IRS’s continued reliance on the forty-year-old master-file software.  We were working on replacing this software through our modernization program, but for now we were still depending on it.  The tax code provision directing the special refund – seemingly simple – actually contained subtleties that reduced the amount of the refund based on how much the taxpayer had paid and whether he or she had used certain tax credits.  Only four programmers understood the part of the master-file software that implemented these provisions, and only one was fully qualified to make the most sensitive changes. [Emphasis added.]

These words should send shivers down the spine of anyone contemplating the IRS’s role in delivering key components of the massive stimulus bill under consideration by Congress today.  To stimulate the economy, the IRS is poised, as it was in 2001 and again in 2008, to send out over 100 million payments  – in addition to those it is processing and issuing as part of the regular filing season.   In 2001, the IRS’s master file system – the official record of taxpayer accounts which GAO has labelled the oldest databases in the federal government – was, in Commissioner Rossotti’s words, “ancient.”  Despite Charles’ optimism, this software is still around today, only it is 19 years older – and now qualifies as being called “prehistoric.”

As the new National Taxpayer Advocate in 2001, I witnessed the IRS pull off the unbelievable feat of issuing these checks in record time.  I learned a great deal about what the IRS does well – rally its troops to accomplish a discrete if gigantic task with little resources.  In fact, the IRS’s skill at delivering checks is a curse to the agency, because it means Administrations of both parties and Congress keep turning to it to implement ever more programs and initiatives.  The agency is in a constant reactive mode of implementing new initiatives even as it falls further behind on delivering its core mission and on replacing its ancient/prehistoric systems.

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This is not to say Congress should stop using the IRS to deliver programs, including economic stimulus.  By virtue of annual return filings, the IRS is uniquely positioned to reach 155 million individual taxpayer households and over 14 million businesses.  These programs, however, should be designed so the IRS can administer them relatively efficiently, and the IRS must be provided the necessary resources for implementation.  In this blog, I look at the CARES Act from the viewpoint of planning and implementation, and examine it in light of IRS and taxpayer experiences in 2001 and 2008.

Setting the stage:  the IRS current workload and the effect of prior Economic Stimulus Payments

In FY 2019, the IRS received 99.3 million calls on its “enterprise” telephone lines, of which only 28.6  million – or 29 percent – were answered by an assistor.  Considering only those calls coming in on the Accounts Management lines (those relating to account inquiries and tax law questions) 28 percent of the 76.8 M net call attempts actually got through to a live assistor.  (Note the IRS calculates its Level of Service (LOS) differently – among other things, it only counts the number of calls it routes to assistors in the denominator; under this calculation, the LOS for Accounts Management was 65 percent.  The Taxpayer Advocate Service believes this figure does not accurately reflect taxpayers’ experience or IRS call demand.  Few taxpayers choose to go to automated lines; in fact, it is the IRS system that forces them to automated lines in response to certain responses by the taxpayer.  I concur with TAS on this point, and will use their figures when available.) 

If past experience holds today, IRS phone service will plummet with the advent of calls arising from the 2020 Economic Stimulus Payment (ESP) program.  (All of these figures come from my June 19, 2008 testimony before the Ways and Means Subcommittees on Oversight and Social Security.)  With respect to the 2008 ESP, as of June 7, 2008, the IRS had received 27.7 million call attempts on its dedicated ESP toll-free line, of which 2.9 million spoke with a live assistor.  The IRS computed LOS on that line for the week of June 7, 2008 was 30.4 percent.  And those were good years for the IRS, when the 2007 LOS for its main phones lines was 80.6 percent.  It also received 316,000 ESP-related visits to its walk-in sites, which are now operated by appointment-only (meaning you have to make a phone call).  All such sites are closed due to the coronavirus. 

The environment for the 2020 Economic Stimulus payment is much more dismal than 2008, even disregarding the impact of the coronavirus.  IRS funding has declined by about 20 percent since FY 2010, adjusting for inflation.  Of its FY 2019 $11.3 billion appropriation, only $2.587 billion was appropriated for taxpayer service (including tax return processing) and $4.678 billion was appropriated for enforcement.  And abysmal $150 million was appropriated for Business Systems Modernization, the account from which Master File replacement is funded.

In March 2020, the IRS was probably already receiving an uptick in calls as a result of people wanting additional information and reassurances about the extension of the filing season.  Adding another 28 or 30 million calls relating to the ESP will just cause the LOS to crater, however one calculates it.  The same employees who answer the phones are also the ones who open and process taxpayer account correspondence.  If the IRS moves more people to handle the phones, it falls behind with the correspondence.  This is precisely what happened in 2008 – the inventory of accounts correspondence more than doubled from the previous year.  The 2008 workload surges don’t take into account the IRS’s coronavirus-related staffing adjustments.  As I understand it, most if not all campus offices have been shuttered, the practitioner priority service line is shut down, the IVES system that verifies taxpayer identity for purposes of releasing questionable refunds is not operative, and TAS is refraining from sending Operation Assistance Requests the operating divisions in order to resolve cases. 

Additional appropriations for ESP hiring or keeping seasonal employees on board longer won’t help the IRS manage the ESP workload if employees don’t have access to systems remotely.  Employees have to be at the mail sites to process mail, but, rightfully so, the staffing has been significantly reduced to ensure social distancing and allow for rigorous cleaning.  The call sites themselves are not set up for telework.  While telework pilots were underway, few call center employees have laptops and government phones that enable them to work from home.

The IRS is aware of taxpayer anxiety and is attempting to calm taxpayers down.  Its coronavirus web page has a plea for taxpayers not to call:

At this time, the IRS does not have any information available yet regarding stimulus or payment checks, which remain under consideration in Congress.  Please do not call the IRS about this.  When the IRS has more specific details available, we will make it available on this page.

But just in case anyone thinks we can head off all these calls with proper communications, the 2001 experience should serve as a guide.  The IRS sent out a letter to every taxpayer who was eligible to receive an additional payment, alerting them to that fact and advising them there was nothing they needed to do to receive the payment – it would come to them automatically over several weeks.  In response to this letter telling taxpayers they didn’t have to do anything, the IRS had its first 1 million call day in its history, in which taxpayers called to ask, was it really true they didn’t have to do anything to get the additional check?  Human nature is what it is.  You can’t make this up.

As with the 2008 legislation, the 2020 “recovery rebate” is structured as a “refundable” credit against 2020 tax liabilities that must be claimed on 2020 individual income tax returns.  To get these dollars into the economy quickly, however, the legislation instructs the Secretary of the Treasury to issue advanced refunds of that credit based on taxpayers’ 2019 or 2018 income, or in the absence of a 2019 or 2018 return, on the basis of Social Security or Railroad Retirement benefits reported on the relevant Form 1099  (For a more detailed discussion of the recovery rebate, see Carl Smith’s PT posts here and here.) 

Because taxpayers are motivated to receive their refunds, the IRS generally has two “bumps” of refund claims – at the start of the filing season, and in the last 3 weeks of the season.  With the EITC and ACTC refund issuance now delayed each year until February 15th at the earliest, the first refund “bump” has been pushed back, but many such returns have already been filed by now, and presumably taxpayers will continue to file refund returns regardless of the filing season extension. 

But for the lowest income and the elderly, how will these returns be prepared?  Free Tax Counseling for Elderly/Tax Aide/AARP sites have all been shut because of the coronavirus, and most VITA sites have closed down.  In 2008, the IRS kept TACs fully operational after April 15, and prepared tax returns for free for people with income of $40,000 or less.  Given the coronavirus protections, all TACs are closed.  At any rate, TACs abandoned return preparation several years ago, so that avenue of assistance is no longer available.  Will low income taxpayers eager for their additional refunds flock to unregulated return preparers, who will charge exorbitant fees and reduce the amount of cash in the hands of these taxpayers to stimulate the economy (other than stimulating the return preparation economy ….)? 

As if the constraints the IRS’s current operating environment were not challenging enough, the coronavirus’ impact exponentially complicates ESP implementation.  In Part II of this blog, I will explore some of the positive changes in the CARES Act, as well as gaps in the legislation and specific challenges relating to implementation.

Stephen Olsen About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.

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Comments

  1. Nina Tross says

    Nina Olson is a trusted source, with a calm voice and practical way of looking at the situation. As the Executive Director of the National Society of Tax Professionals (NSTP) we value her continued involvement and sharing her many years of knowledge. We have every confidence the IRS will pull through this – it is the tax professional community that will need all the help they can get.

  2. As a tax professional, I trust what Nina Olson has to say. I pray that the public at large understands the issues the IRS is up against and gets behind funding the upgrades that are necessary to make this very important part of our government function properly.

  3. Bob Kamman says

    No one can replace Nina Olson but I hope the new NTA who just succeeded her will have the ability to publicly explain some history behind IRS shortcomings, while privately calling it out on some of its foolishness.

    For example, “Make your first 2020 quarterly payment on July 15, and your second one on June 15.”

    And have you heard the one about the returns that Social Security beneficiaries must file to receive their $1,200?

    At the moment, the IRS website tells us:

    “People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment. Low-income taxpayers, senior citizens, Social Security recipients, some veterans and individuals with disabilities who are otherwise not required to file a tax return will not owe tax.”

    https://www.irs.gov/newsroom/economic-impact-payments-what-you-need-to-know?fbclid=IwAR1tMjhr4ZXDdYrVg0U-DPuu4xALu8bahcLfERdKf4bf56wwTuKMoVzJUJA

  4. Laurie B Kazenoff Esq says

    Thank you Nina for your wonderful insights. We miss you!

  5. Francine Lipman says

    Thank you Nina Olson for stepping forward with impeccable wisdom based on your unparalleled depth and breadth of experience, but most significantly facts and figures. They are compelling as well as jaw dropping given this perfect storm. When I face a tax justice dilemma these days I step back and ask myself, what would Nina do? America today faces an unprecedented crisis. I am anxious to read your next post.

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