IRS Plunges Into Tax Law Changes Even as Its Budget Remains Shaky

Internal Revenue Service employees got their tax reform marching orders from the Treasury Department on Thursday as the tax service released new withholding tables designed to allow taxpayers to feel the impact of tax cuts in their own paychecks.

But the IRS’s budget—which has been slashed in the past six years so that training funds are down 75 percent—remains caught up in the broader congressional stalemate over fiscal 2018 funding for the government.

And in her annual report released on Wednesday, National Taxpayer Advocate Nina Olson decried both the declining funding amid heightened workload and the poor dollar returns on Congress’s much-touted mandate that the agency contract with private debt collectors.

Treasury Secretary Steven Mnuchin, during an appearance Thursday in the White House press room, hailed the “round the clock” holiday-season work of the Treasury Department’s Office of Tax Analysis in designing new payroll withholding tables that an estimated 76 percent of taxpayers use to set amounts that qualify them for a tax-season refund. “Next, the IRS will be releasing a new withholding calculator that will be available on IRS.gov by the end of February,” Mnuchin said. “This will help provide individuals with certainty so that they are neither over-withheld nor under-withheld and can plan their financial decisions.”

The new withholding tables reflect the increase in the standard deduction, repeal of personal exemptions and changes in tax rates and brackets, the IRS said. The agency “appreciates the help from the payroll community working with us on these important changes,” said acting IRS Commissioner David Kautter. “Payroll withholding can be complicated, and the needs of taxpayers vary based on their personal financial situation. In the weeks ahead, the IRS will be providing more information to help people understand and review these changes."

Both Treasury and the IRS will help design a new W-4 form for next year’s filing season to be released by the end of this year. “And the IRS will continue to focus on simplification and a user-friendly process,” Mnuchin said.

Though the new tables “will help deliver the tax cuts as soon as possible to as many Americans as possible, with as little disruption as possible,” Mnuchin denied accusations that he and Congress had rushed the IRS to implement a complex bill.  “Absolutely not,” he told reporters. “I mean, we update the withholding tables every year.  You know, there’s more work, but again, our objective is to get people money as quickly as they can.”

As Congress struggles with a fiscal 2018 governmentwide funding deadline of Jan. 19, there is some talk among key Republicans—now that their long-sought tax cuts are in law—of adding funding to the tax agency while seeking reforms.

“We’re reviewing the recommendations from the Taxpayer Advocate about her views on the resources the IRS needs to effectively administer the new tax code,” House Ways and Means Chairman Kevin Brady, R-Texas, told reporters on Thursday. “I’ve been visiting with Secretary Mnuchin and Acting Commissioner Kautter on the best path forward as well. But to be clear, circumstances have changed at the IRS. This is an agency that for years has mismanaged its funds, has a terrible record of customer service, fraud and abuse in the system, and they failed to protect taxpayer information. Now, we have a new tax code, a new Acting Commissioner, who first wants to make sure they’re using existing resources the right way, but secondly are going to be making recommendations to us on how they can most effectively implement the new tax code. And there’s no doubt that this is a-once-in-a-generation challenge for the agency, as well. So, we want to make sure they can meet it.”

Senate Finance Committee Chairman Orrin Hatch, R-Utah, told Government Executive through a spokeswoman that, “Conversations regarding the administration of tax laws—both current and potential future changes—are ongoing with the IRS. With pro-growth tax reform finalized, Chairman Hatch is working closely with the administration to ensure a proper and seamless implementation of the new policies.”  

The latest appropriations bills would cut the IRS budget by $100 million, as the National Treasury Employees Union noted in a statement. After the previous tax reform in 1986, the agency changed 162 existing forms, developed 48 new forms and created 13 new publications, according to the National Taxpayer Advocate. Call volume increased by 14 percent, and the agency added 1,300 staff to increase their ability to answer questions from taxpayers and business owners,” NTEU noted.

“The IRS absolutely needs more funding,” Olson said in her report. “It cannot answer the phone calls it currently receives, much less the phone calls it can expect to receive in light of tax reform, without adequate funding. But within the budget it currently has,” she acknowledged, “there are plenty of opportunities for the IRS to demonstrate that it can do a better job of using creativity and innovation to provide taxpayer service, encourage compliance and address noncompliance.”

Though the IRS has not yet developed a final cost estimate to implement the new law, she said, “a preliminary estimate from earlier in the year projected the agency would require additional funding of $495 million in fiscal years 2018 and 2019.”

Among 21 problems the advocate identified at the IRS, she devoted particular space to reporting the agency’s required second try over the past two decades to use contractors to go after the most stubborn tax delinquents. Before requiring the new effort, lawmakers were warned by unions and consumer groups that the earlier efforts were not a success and that the methods used by non-IRS employees risked abusing vulnerable taxpayers. In fiscal 2017, IRS figures showed, the agency collected $6.7 million in payments from taxpayers whose debts were assigned to private collection agencies. But the total cost of the program was $20 million, three times the amount collected, Olson’s report noted.

The initiative is not raising net revenue, she added. “The IRS letter advising taxpayers that their account is being assigned to a [private collection agency] is generating 40 percent as many dollars for the public … as collection activity by PCAs does. At the same time, the IRS pays commissions to PCAs on payments from taxpayers that are attributable to IRS, rather than PCA, action.”

Chi Chi Wu, a staff attorney at National Consumer Law Center, on Thursday called the private debt collector program “the epitome of waste and abuse in government programs. Forcing the IRS to use private debt collectors to put the squeeze on vulnerable low-income families simply lines the pockets of these private collectors while jeopardizing the economic well-being of families,” she said.