5 Things Holding Innovation Back at the IRS

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Believe it or not, the IRS has some budget and the will to modernize in the interest of public service.

Frustration with the IRS—it’s practically an American tradition. But now, thanks to the Inflation Reduction Act, the infamously hamstrung institution has been promised $80 billion over the next decade. The range of responses elicited by this decision make it clear that many of us are struggling to sort out what this realistically means for our families when filing season rolls around.  

While the institution plans to use these funds to modernize its infrastructure, better target audits, increase tax collection from corporations and high-income individuals, and improve customer service offerings, this windfall won’t immediately fix all of the IRS’s core issues. The truth of the matter is that the IRS’s internal environment, policies and legislation have long impacted its ability to operate smoothly. 

For example, many of the IRS’s functional issues are at their root one issue: the absurd complexity of the tax code. Most of the time, when Congress passes legislation, the onus is on the IRS to manually implement all of those changes. If Congress passes a law that incentivizes electric cars, for example, they might rely on the IRS to give a tax credit to owners or manufacturers of electric vehicles. Every piece of legislation passed adds another layer of complexity to the tax code. 

When you consider that Congress passed 20,253 pieces of legislation between 2019 and 2021, you can imagine just how convoluted the tax code can get. While the Inflation Reduction Act aims to make the tax code more equitable, it doesn’t target tax code reform, and will be difficult and time consuming to implement. 

It still may be some years before we begin seeing the benefits of the institution’s efforts to better serve taxpayers, but with everything it has endured over the last few years, perhaps the IRS is more deserving of empathy than ire. 

Covid-19 closures buried the IRS

At the close of the 2021 filing season, the IRS had a backlog of over 35 million returns. Just weeks before the 2022 filing date, they still had about 7 million to process, and it is still struggling to keep up. IRS employees aren’t sitting on their hands—on the contrary, they've been busy re-allocating their meager resources so they can address this pileup.  

When an entire organization has to transition to working from home—thanks, COVID—it involves setting up new infrastructure, including doling out laptops outfitted with specific security measures and making sure everyone has home access to the internet. These little things inevitably become massive issues. 

When the IRS reopened in June of 2020 after its first COVID-related closure, it was greeted with 23 million pieces of unopened mail. Paper returns and amendments take far longer to process than electronic ones. And COVID-19 didn’t just bury the IRS in paper returns—it fell on the IRS to create and implement a program for stimulus payments and employee retention credits. It had to follow along with codified changes in real-time, as well as deal with over 10 million returns that contained a stimulus amount that didn’t match with IRS records. 

The IRS is seriously understaffed 

The number of people working at the IRS as we entered 2022 was close to the number of people working there in 1974. Because the average age of an individual employed at the IRS is 55, over 50,000 employees will reach the end of their careers over the next few years.

The Treasury Department plans on eventually hiring 87,000 employees to replace those who will soon retire. They’re particularly focused on hiring customer service professionals and skilled technicians who can update the IRS’ infrastructure. However, while many employers have had to raise salaries to attract candidates because of The Great Resignation, the IRS can only afford to pay employees $15/hour. This may discourage many individuals from applying, as might the bizarre efforts of a few GOP politicians who are attempting to dissuade job seekers from joining the IRS. 

Core conflicting philosophies between Republicans, who want a smaller government, and Democrats, who are attempting to expand governmental powers, make it challenging to come to a solution that addresses the structural issues impeding the IRS’s functioning. Annual administrative and political changes make predicting and planning budget-driven initiatives practically impossible. 

Updating IRS’s technological infrastructure presents significant challenges 

The IRS’s technological infrastructure is literally from another era. It’s a major reason customer service representatives are frequently experiencing problems that impact their ability to serve taxpayers. And while the IRS has now received substantial funding, solving this issue isn’t as simple as swapping in new technology for the old. Upgraded tech requires hiring a different type of employee with the skills to operate it. But, when it comes to compensating tech specialists, the government can’t compete with the private sector. Retraining existing staff would be a massive undertaking.  

IRS software systems are siloed off into hundreds of programs. This makes them hard to work with and contributes to a large number of inadvertent errors that slow down the filing and returns process. This complexity makes upgrading the IRS’s tech stack an even more monumental task, as changes are likely to impact the entire system in unforeseeable ways. Who knows how long it will take to execute legislation created to reform the IRS itself, most notably the Taxpayer First Act?

Taxpayers struggle with a sense of clarity concerning IRS internal operations 

Finding out details about a delayed refund, a return pulled for inconsistencies or an amended return processing delay can feel impossible. Americans reportedly visited the IRS website to learn the status of their tax refunds over 630 million times in 2021. Underfunding has kept the “Where’s My Refund” tool frustratingly opaque, while processing delays leave many individuals stuck on the “return received” message for weeks, or even months, with no way to get further information. 

The IRS now has resources that could enable it to create a website that offers taxpayers the answers they’re looking for, as well as update its technological infrastructure to some degree. But as the House veers Republican from the midterm election, the amount of money it has been allocated might be restricted, stymying its efforts at a comprehensive upgrade. 

One other obstacle? The National Taxpayer Advocate Annual Report to Congress states that the department has struggled to track taxpayer complaints, as well as why customers choose to use some service channels over others. This means the IRS could fall into the trap of accidentally using these funds in a way that ultimately doesn’t totally transform the taxpayer experience.

An essential touchpoint hit by understaffing and pandemic-induced paper pileup 

In 2021, only 10% of the 282 million phone calls to the IRS actually reached an IRS employee. Between staff reductions and the explosion of paperwork that resulted from the pandemic, there weren’t nearly enough people to answer every call. 

The IRS’s ancient technology plays a key role in the lack of attentive customer service via phone: customer service representatives lack a centralized enterprise case management system that would give them easy access to the taxpayer information they require in order to answer questions and resolve issues efficiently. 

Modernization is a marathon, not a sprint—but the race is on

The IRS has been backed into playing the role of “bad actor,” but in reality, it’s a scapegoat. Remember, the IRS didn’t write the tax code—it only executes policies that are passed to it by Congress. Even with the aid of $80 billion, it will probably be a while before we see an overhaul of the IRS’s inner workings. In the meantime, there are small actions every individual can take, such as filing online and with the aid of a tax professional, to improve both their interactions with the IRS and the IRS’s functionality in the immediate future. 

While some worry that the IRS is prepared to use these funds to amp up their amount of agents in order to crack down on middle and low-income Americans—a claim that Treasury Secretary Janet Yellen denies—I’m optimistic that this money will be used in a way which helps us all.  

Our journey towards a healthier IRS that offers equity in the tax paying system and an adequate level of service for all individuals begins with the steps outlined in the Inflation Reduction Act. Anger, cynicism and fiction focused on armed and dangerous IRS agents pales in comparison to the power of a healthy dose of hope and empathy. 

Hansen Rada is the Co-Founder and CEO of Tax Guard. From the beginning in 2009, he’s been responsible for the overall strategic direction and operations of the company. His entire career has been spent with an entrepreneurial vision of innovation, disruption and problem solving. He co-founded 20/20 Tax Resolution in 1998 which assists businesses and individuals around the country in resolving their outstanding tax liability issues with the IRS. With over a decade of deep expertise in working directly with the IRS, he developed Tax Guard as a pioneering risk management concept for commercial lenders. Rada holds a B.A. in Biology from Rhodes College in Memphis, TN.