Another Shutdown Could Mean the Most Troubled Tax Season in Recent History

(Bloomberg) -- The IRS would risk one of the most troubled tax seasons in recent history if congressional leaders’ deal to avert another government shutdown collapses.

The agency is already “on shaky ground to begin with,” after the 35-day shutdown that began in late December, said former Internal Revenue Service Commissioner Mark Everson. A second shutdown could cause refund delays, technical glitches and staff shortages in a tax season already complicated by the implementation of the vastly complicated tax overhaul.

“The picture only gets more dire if there is a shutdown for any duration," said Everson, who served in the George W. Bush administration and now is a vice chairman at consultant Alliantgroup.

If Congress doesn’t pass legislation to continue funding the government that President Donald Trump can sign by midnight Friday, the nation faces another partial shutdown. That would mean the IRS would have to send about 43 percent of its workers home, according to the agency’s plan.

Republican and Democratic congressional negotiators reached a tentative deal Monday night to avert a shutdown. The agreement still has to be written into legislation, pass both chambers of Congress and get Trump’s approval. Trump told reporters Tuesday that he wasn’t happy with the deal but he didn’t think the government would shut down again.

The IRS is “hung over” from a series of obstacles besides the last shutdown, Everson said. In addition to all the changes in deductions in the new law, the overhaul also required a redesign of many of the IRS’s forms and systems. And it is still reeling from several years of funding cuts Republicans pushed to punish the IRS for targeting conservative groups during the Obama administration.

And the first filing season since the 2017 overhaul is well under way.

The remaining IRS employees would stay on the job without pay until the impasse over border security is resolved and Trump signs a spending bill. Employees responsible for accepting tax returns and processing refunds would be expected to continue working, but other critical functions at the agency, such as audits or assisting taxpayers who had their identities stolen, would ground to a halt.

The last shutdown, the nation’s longest, ended just days before the start of the tax season in late January. In the final days of the impasse, the IRS called tens of thousands of employees back to work to prepare for the filing-season, but more than half of the workers in the division responsible for processing tax returns didn’t show up.

“How many of those employees will actually go to work and process returns and get refunds out the door? Employees may just not show up this time,” said Patrick Thomas, director of Notre Dame Law School’s tax clinic.

The National Treasury Employees Union, which represents IRS workers, sued the federal government during the standoff, saying it was unconstitutional for the agency to require so many employees to work unpaid.

The IRS is already struggling to recover from the budget impasse, according to initial data tracking the filing season, sending out about 24 percent fewer tax refunds compared to the same period last year.

Another shutdown could also put the IRS computer security functions at risk, according to Mark Mazur, a former Treasury official who now runs the Urban-Brookings Tax Policy Center. About 25 information technology staff members a week quit during the shutdown, and another two dozen IT workers retired during that period, according to information the IRS provided to congressional staff.

“There are lots of potential job openings for these people elsewhere,” Mazur said.

Computer malfunctions have plagued the IRS as the agency tries to update systems built on 1950s-era technology and hackers become more adept. Last year, the IRS had to extend the filing deadline by a day after its website crashed on what was supposed to be the filing deadline.

The shutdown, and the threat of another one, also makes it difficult for the agency to recruit and hire seasonal staff who interact with taxpayers, said Caroline Bruckner, the managing director at the American University’s Kogod Tax Policy Center.

The taxpayers who rely on IRS help are often low-income and depend on refunds to pay for major expenses, such as health care, she said. There are “serious consequences" if the refund is delayed or smaller than anticipated, Bruckner said.

“You can only beat a dog so many times before it bites you,” Everson said. “We are on the edge of something bad.”

IRS representatives didn’t respond to a request for comment.

©2019 Bloomberg L.P.

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