IRS may need an extra half billion dollars to implement new tax law over the next two years

Show Caption Hide Caption Trump touts tax overhaul as boon for farmers US President Donald Trump is hailing the Republican tax overhaul law during a pitch to rural America at a meeting of the American Farm Bureau Federation. (Jan. 8)

Corrections and clarifications: An earlier version of this story overstated the amount of money the IRS may need to implement the tax bill.

The Internal Revenue Service has estimated it may need nearly half a billion dollars more over the next two years to implement the new tax law passed by Republicans and signed by President Trump just before Christmas, the agency's independent taxpayer advocate said Wednesday.

"The IRS absolutely needs more funding," National Taxpayer Advocate Nina Olson wrote in her annual report to Congress. "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."

Olson said the IRS was still calculating the impact of the new law, but preliminary estimates said it would need an extra $495 million this year and next year to implement the sweeping overhaul of individual and corporate taxes.

Last year's IRS budget was $11.2 billion. Though the current fiscal year began Oct. 1, Congress still has not set funding levels for federal agencies and faces a Jan. 19 deadline to reach a deal to prevent a partial government shutdown.

The IRS needs money for programming and system updates, answering phone calls, drafting and publishing new tax forms, revising regulations and guidance, training employees and developing ways to verify compliance and spot potential fraud, Olson said.

The leaders of the committees that wrote the tax law stopped short Wednesday of pledging to spend another half-billion dollars for the IRS.

House Ways and Means Committee Chairman Kevin Brady, R-Texas, is talking with the Trump administration about how the IRS can administer the new tax code and improve customer service "with existing resources, as well as evaluating what new resources they may need," spokeswoman Lauren Aronson said.

Senate Finance Committee Chairman Orrin Hatch, R-Utah, is working with the administration "to ensure a proper and seamless implementation of the new policies," spokeswoman Julia Lawless aid.

The head of the National Treasury Employees Union, Tony Reardon, said the advocate's report shows the implications of years of budget cuts.

“You can’t expect the same level of service after losing $900 million and 21,000 full-time employees in seven years,” Reardon said.

Though the tax overhaul was originally touted as a way to simplify the code, in some cases Congress added new complications.

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For example, the law reduced the maximum home mortgage interest deduction from $1 million to $750,000 for debts incurred after Dec. 15, but it included exceptions for most refinancings and for loans closed after Dec. 15 that had prior binding purchase contracts.

The problem, however, is that the IRS generally does not know when a mortgage closes, the terms of a refinancing or the date of a purchase contract. For that provision alone, the IRS will have to develop forms and systems to figure out which mortgages are deductible and which are not.

Olson said funding for the IRS has dropped by about 20%, in inflation-adjusted terms, since 2010.

"Funding cuts have rendered the IRS unable to provide acceptable levels of taxpayer service," Olson wrote. "'Shortcuts' have become the norm and 'shortcuts' are incompatible with high-quality tax administration."

The report said that the agency's decision to assign some taxpayer accounts to private collection agencies in April 2017 cost $20 million to run, and collected $6.7 million in tax payments. In some cases, Olson wrote, the IRS paid commissions to agencies for payments that were attributable to the IRS itself and not the agencies.

For the most part, the new tax law affects income earned in 2018, and the returns taxpayers must file this year deal with income earned in 2017, under the old tax rules.

But that does not mean the IRS has a year to get up to speed. Some issues have already arisen, such as taxpayers trying to prepay property taxes before Dec. 31 so it would not be subject to a new $10,000 cap on the deduction.

The IRS is also under pressure to release new tables in coming weeks that set how much tax must be withheld from workers' paychecks. Until those tables are provided to employers and payroll companies, workers who are due to receive tax cuts won't see bigger paychecks.

Trump has said the new withholding amounts could start in February.