The IRS could face an avalanche of corporate tax refund claims next year resulting from business losses during the COVID-19 pandemic, but enhanced income reporting should help with tax administration, a former agency chief said.
The five years of carrybacks for corporate tax losses allowed under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) will produce “gigantic refund claims from businesses that lost gigantic amounts of money during the crisis,” according to former IRS Commissioner Charles O. Rossotti.
At the same time, Rossotti said during a September 3 Urban-Brookings Tax Policy Center webinar, technology businesses have been making “unprecedentedly big profits, and they’re the ones that have the greatest flexibility to reallocate that money, for example, overseas,” which would be a challenge for IRS tax administration in dealing with the tax gap.
“So I would expect that, whatever the [IRS’s] situation was, it’s going to be even more dire over the next few years,” said Rossotti, now a senior adviser with the Carlyle Group.
Rossotti proposed an ambitious plan in March to modernize tax compliance and assistance using technology investments and new reporting requirements, estimating that the government could recover more than $1.6 trillion over 10 years.
“Most business taxpayers pay 100 percent of what they owe,” Rossotti said during the webinar. “So why should some of them do that, and another large percentage — just because there’s no reporting — not do it?”
According to Rossotti, the IRS could reduce what he projected to be $574 billion of taxes that were legally due but not paid in 2019 by implementing technology modernization and increased third-party income reporting of passthrough entities, sole proprietorships, and others to banks. That process would be similar to income reporting already applied to wages, he noted.
“We’re going to have to do something,” Rossotti said. “I don’t know why it would be fair, myself, to raise taxes on the people who are already compliant before you do something that you can do to at least collect the taxes that are already on the books.”
USPS Slowdown
Rossotti praised the IRS’s performance through the first five months of the pandemic, including the three-month extension of the 2020 filing season, and its distribution of more than 150 million emergency economic impact payments.
“But [on] the other side of it, that’s about all they could do,” Rossotti said, noting that the IRS still has “a huge backlog of just ordinary processing . . . and pretty much all outgoing enforcement activities were stopped until just very recently.”
However, the apparent slowdown of mail deliveries through the U.S. Postal Service could hamper tax agency operations and communications with taxpayers, Rossotti said.
“But that’s one of the things that, with technology, we could really make a big dent in,” Rossotti added. Application of new and expanded IRS electronic services would make postal delays a “solvable problem in the relatively near term,” he said.
The former commissioner expressed confidence that, barring major new developments, the apparent politicization of federal services such as the post office is not a problem at the IRS.
“That’s one place where the IRS is really resilient,” Rossotti said. “The entire culture of the IRS is extremely resistant to any form of external influence or politicization.” The Treasury Inspector General for Tax Administration has 1,000 people continually auditing IRS operations, he noted.
“Anything could happen in the future, but as of now, I really don’t worry about [politicization] inside the IRS,” Rossotti said. “Not that it couldn’t change, but it would take a hell of a lot of work to change that.”
Political Leadership Needed
Rossotti’s proposed tax compliance and assistance plan would focus on unreported and underreported business and individual income.
Wages, pensions, and most dividends and interest are almost fully reported, while less than half of some types of business income are reported, Rossotti said.
“Where we don’t have visibility because we don’t have reporting, we would institute some additional reporting” under the plan, Rossotti said, noting that “the IRS doesn’t even use all the information it has” to match actual income with reported income.
The plan would require more IRS staff and technology modernization, Rossotti noted. The agency “would have to purchase new technology, but a lot of it is more applying technology,” he said. “The purchasing is really the pretty easy part. . . . It’s business processes enabled by technology.”
Rossotti lamented that the IRS is still underfunded relative to the demands for its services. Over the last 25 years, the agency has experienced a 35 percent reduction in resources and a 30 percent increase in demand, he said.
And while Congress pays lip service to the need for IRS modernization, the funds it allocates are insufficient for and inconsistent with the tasks, Rossotti said.
In a September 3 blog post urging Congress to fully fund a multiyear, flexible tax agency IT modernization program, National Taxpayer Advocate Erin M. Collins noted that the IRS estimated that it needs $2.5 billion over six years for its modernization plan. Yet Congress so far has provided just $150 million for fiscal 2019, and $180 million for fiscal 2020, Collins said.
No IRS commissioner can implement such a long-term plan without a commitment from the president and the Treasury secretary to make it happen, Rossotti said. “It would take some political leadership to make that case, that it makes sense to do this . . . before you do anything else, or at least as part of doing anything else,” he said.
Rossotti teased a coming article in Tax Notes, which he said will lay out in “gory detail” which technologies he recommends the IRS purchase and how they would be used at the agency.