Who is a fault for the IRS’s Incredible Incompetence?

Millions of calls from taxpayers to Taxpayer Service never get answered. After spending hours on hold, you might hear a click and then a dial tone. This is the IRS’s ‘curtesy hang-up’ because their computer has calculated they will not get to your call today.

Millions of IRS notices have gone out asking “Where is your 2020 Tax Return?”.  Recently they admitted to more than 8 million unprocessed returns sitting in stacks somewhere. Their computers show nothing filed as a result, and the taxpayers are left with two bad options. One – ignore the notice on the assumption that sooner or later the IRS will get their return processed, or Two – send in another copy and further add to the backlog.

Who is responsible for this incredible mess? Interestingly enough – it’s not the IRS people. It’s Congress.  I recently heard on a podcast by some very credible tax attorneys on just how the IRS budget works. Now bear in mind that the Federal Government spends a lot of time and money on hiring a competent Commissioner to oversee the IRS. However, that person has his or her hands tied behind their back from the get-go. The IRS does not get a lump sum authorization of money to run its operations. Instead, the budget is allocated to various functions. Some for answering phones, some for processing returns, some for audits, etc. If the demand for answers on the phones goes up, the commissioner cannot simply reassign auditors to help with the shift in demand. This is ludicrous. Why bother hiring high-end people to run the joint, if you are not going to give them the authorization to actually do the job?

The latest government budget bumps the IRS share by more than 12 billion dollars. Maybe it will help them get their act together with answering the phones and processing. I don’t think I will take that bet.

Latest IRS stats are released

The IRS issued its “Data Book” for FY 2019. This is an 80-page report on IRS activities for the 12 months ended 9/30/19. The most useful information that I can find in it is in regard to Offers-in-Compromise. Offers are where the IRS accepts less than the full amount owed and writes-off the balance. This is the fabled “pennies on the dollar” that you see on TV ads.

Only 33% of the 54,255 offers were accepted with an average offer amount of $16,177. They unfortunately do not report on the number we would really like to know – the average write-off amount. It would be very interesting to know if the write-offs average north of $200 thousand dollars. Well maybe that is not all that important. Given that the IRS has the best collection tools around, they are not likely to accept an offer unless they thought it was the best deal they could get. The reality is that Offers are not the cake walk that the TV commercials display.

It is no secret as to why 2/3 of the offers are rejected. Either the taxpayer is not in compliance with filing and paying their current year taxes or the offer amount was too low. The IRS uses a formula based on the taxpayer’s equity in assets they own plus their future projected cash flow. Failing to do this calculation in advance of filing the offer means the taxpayer is shooting in the dark.