National Taxpayer Advocate Nina Olson outlined concerns about how the Internal Revenue Service will be able to implement the new tax law after a series of budget cuts, in her new report to Congress.
The 2017 Annual Report to Congress from the IRS’s Taxpayer Advocate Service, headed by Olson, discusses some of the challenges the IRS will confront as it implements the recently enacted tax reform legislation. The report pointed to the reduction in IRS funding of approximately 20 percent since 2010. Olson noted the budget cuts have challenged the IRS’s ability to perform even the basic tasks of administering the tax system, not to mention the work involved in getting the new Tax Cuts and Jobs Act up and running at the IRS and for taxpayers.
“As the National Taxpayer Advocate, I see daily the consequences of reduced funding of the IRS and the choices made by the agency in the face of these funding constraints,” Olson wrote in the preface to the report. “These impacts are real and affect everything the IRS does. Funding cuts have rendered the IRS unable to provide acceptable levels of taxpayer service, unable to update its technology to improve its efficiency and effectiveness, and unable to maintain compliance programs that both promote compliance and protect taxpayer rights. ’Shortcuts’ have become the norm, and ‘shortcuts’ are incompatible with high-quality tax administration.”
The report noted the IRS is already struggling to meet the service needs of taxpayers, especially when it comes to answering the phones. Typically the IRS receives more than 100 million phone calls a year. Even before enactment of the tax cut law, the IRS was estimating it would only be able to answer around six out of 10 calls from taxpayers routed to speak with a telephone assistor during the filing season and about four out of 10 taxpayer calls during the full fiscal year.
The IRS has not yet come up with a final cost estimate for implementing the new tax law, but a preliminary estimate projected the agency would need another $495 million in funding in fiscal years 2018 and 2019. The challenges include programming and systems updates, answering taxpayer phone calls, drafting and publishing new forms and publications, revising regulations and issuing other guidance, training employees on the new law and guidance, and developing enough capacity in its systems to verify compliance with new eligibility and documentation requirements.
As one example of the challenges the agency faces, and the questions the IRS can expect from taxpayers, the new law reduces the maximum home mortgage eligible for the mortgage interest deduction from $1,000,000 to $750,000 for indebtedness incurred after Dec. 15, 2017. It provides an exception for most (but not all) refinancings along with an exception for some loans closed after Dec. 15, 2017 pursuant to binding purchase contracts. Right now, the IRS typically doesn’t know the date of a mortgage closing, the terms of a refinancing, or the date or terms of a purchase contract. It will need to develop clear guidance for taxpayers and develop forms and systems capacity to distinguish between loans subject to the $1,000,000 cap and loans subject to the $750,000 cap.
At the time, the agency developed its preliminary cost estimate, the IRS had identified 131 filing season systems that will be affected by the new legislative provisions and must be modified to, among other things, reflect new individual and business tax rates, inflation-indexing changes for deductions and credits, phase-out changes for certain tax benefits, elimination of certain tax benefits, and changes in law that will require updating the IRS’s fraud-detection filters.
“The IRS will have its hands full in implementing the new law,” Olson said. “We have already seen confusion about withholding changes, confusion about the deductibility of prepaid property taxes, and confusion about whether states can allow taxpayers to make charitable contributions in lieu of taxes as a way of permitting their residents to claim larger tax deductions than would otherwise be allowed because of the new $10,000 cap on the state and local tax deduction. The IRS will have a lot of issues to work through, and taxpayers will have a lot of questions. But with more funding, strong leadership, and a closer working relationship with Congress, I am convinced the IRS can do the job well.”
Olson also released a new publication, “The Purple Book,” on Wednesday offering 50 legislative recommendations for strengthening taxpayer rights and enhancing tax administration. Among the new recommendations, Olson is recommending Congress codify both the Taxpayer Bill of Rights and the IRS mission statement as Section 1 of the Internal Revenue Code. The Purple Book also recommends ways to strengthen taxpayer rights and the tax-filing process, improve IRS assessment and collection procedures, reform the tax code’s penalty and interest provisions, strengthen taxpayer rights before the Office of Appeals, enhance confidentiality and disclosure protections, and strengthen the independence of the Office of the Taxpayer Advocate.
The report to Congress also looks at a variety of other tax administration issues, including the IRS’s administration of the private debt collection program, the agency’s increasing emphasis on online taxpayer accounts, and how it is implementing a recent law that would deny or revoke the passports of taxpayers with significant tax debts.