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As Cliff Looms, IRS Braces for Chaos As Cliff Looms, IRS Braces for Chaos

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As Cliff Looms, IRS Braces for Chaos

At the beginning of each year, the Internal Revenue Service issues forms and instructions to help employers calculate tax withholding from workers’ paychecks. The new year is also crunch time for issuing guidance to taxpayers before the April filing deadline. The process is always hectic, but in 2013, it could be especially chaotic.

Uncertainty about the fiscal cliff, a tight budget, and turnover at the agency’s helm threaten to disrupt the 2013 filing season, which could mean headaches for businesses and individuals.


If Congress fails to resolve its gridlock, the country could tumble over an economic ledge in early January when a slew of tax increases and automatic spending cuts are set to kick in. Roughly 100 tax cuts either expired before the end of 2011 or are set to do so by the end of 2012 unless Congress acts to extend them. Those include the 2001 and 2003 Bush tax cuts but others as well. Also set to expire is a temporary cut in the payroll tax enacted in 2010. There is bipartisan interest in extending the tax cuts for middle-class Americans, but Republicans want to renew them for the wealthy, too. Democrats are balking at that idea. Some Democrats have expressed interest in extending the payroll-tax cut for another year, but others seem lukewarm to that idea.

According to a new Tax Policy Center analysis, if all of the tax provisions are allowed to expire, every income group would see taxes rise by at least 3.5 percent, and each household could face an average tax hike of almost $3,500. Experts say that such an increase could send the economy back into recession.

Like the rest of  the country, the IRS is at the mercy of Congress, which is faced with reaching a deal during the postelection lame-duck session. Whether or not—and when—Congress extends the fiscal-cliff provisions will decide how the IRS readies forms, instructions, and withholding tables for 2013, which in turn determines how much each household and business must contribute in taxes next year. But no matter whether Congress can compromise, the IRS must finalize forms and set withholding tables for 2013 by Jan. 15 so employers can cut the first paychecks of the year. If Congress waits till the eleventh hour to cut a deal, that would give the IRS just two weeks to finalize, and perhaps revise completely, the work of its entire filing season.


“The IRS is sort of caught in the middle, as we all are right now,” said Abraham Schneier, senior technical manager for taxation at the American Institute of Certified Public Accountants. “But there is a point beyond which they cannot wait.”

The more rushed the process of finalizing the filing season, the greater the likelihood that errors will occur, Schneier said. Confused taxpayers could end up filing inaccurate returns, which in some cases could result in penalties. Refunds could be delayed, and fraud and identity theft might go undetected. Regardless of whether the scheduled tax hikes are allowed to go into effect, small technical errors in the filing process will ultimately result in more grief and could burden already-cash-strapped families.

The complications pose a further hurdle to the IRS, which has already been grappling with strained resources. In its latest report to Congress, released on Jan. 11, 2012, the Taxpayer Advocate Service suggested that IRS staff was already overburdened. The report identified the most serious problem facing taxpayers as “the combination of the IRS’s expanding workload and the limited resources available to the IRS to handle it.” Despite a huge expansion of the agency's workload, due to a variety of factors such as the increasing complexity of the tax code, Congress has reduced IRS funding in each of the last two years. The looming year-end sequestration threatens to inflict further cuts to the agency’s 2013 budget.

“The IRS’s ability to fulfill its critical mission is threatened by a lack of resources,” said Colleen Kelley, president of the National Treasury Employees Union, pointing out that staffing at the agency has decreased each year since 1995. The IRS now has fewer than 91,000 employees to process more than 236 million tax returns.  By comparison, in 1995, the IRS had a staff of just over 114,000 to process 205 million returns. Technology has helped, but the tax code has only grown more complex since the mid-1990s.


Taxpayers are already experiencing some of the consequences, Kelley said, adding that the IRS’s capacity to respond to inquiries over the last few years has been “severely diminished."

Meanwhile, the Internal Revenue Service anounced on Oct. 10 that Commissioner Doug Shulman will step down on Nov. 9, the last day of his term. Deputy Commissioner for Services and Enforcement Steven Miller will serve as acting commissioner until the IRS appoints a new commissioner. The Tax Policy Center’s Eric Toder said Shulman’s retirement will have minimal impact on the effectiveness of the IRS in the short term, but as time goes on the need for a permanent commissioner becomes more urgent.

If it takes a year or longer to appoint a new commissioner, American University’s David Kautter, executive-in-residence in the Department of Accounting and Taxation, said “that really starts to hurt.” And, particularly if the fiscal-cliff gridlock drags into the new year, lack of leadership could have a significant impact on the effectiveness of the agency in 2013 and its ability to administer the 2014 filing season.

While powerless to permanently halt changes to the tax code, the IRS may be able to temporarily deflect the blow. Technically, the IRS has the authority to issue withholding tables that it deems most appropriate to carry out the tax law, Kautter wrote in an e-mail. But the IRS must walk a fine line between what the current law is, and what the agency anticipates it will be. For instance, if Congress does not get a deal before Jan. 1, the agency could temporarily keep current withholding tables in place if there seems to be a strong likelihood that lawmakers will break their stalemate and extend the expiring tax provisions early in the new year. But it will end up being a tough judgment call.

The IRS and the Treasury Department declined to comment about how they are preparing for the upcoming filing season, but experts believe that the tax agency may be drawing up multiple sets of withholding tables and tax forms—for example, the itemized-deduction form, which will change depending on whether or not Congress extends certain tax deductions—to prepare for whatever decision Congress makes.

Still, pressure is mounting as the deadline looms.

“That clock doesn’t have a lot of wiggle room in it,” said Scott Hodges, president of the Tax Foundation, adding that the uncertainty facing the IRS this year is “unprecedented.”

“The IRS needs a specific amount of lead time in order to properly make sure that the forms are correct and all the schedules are correct," Hodges said. "If they don’t know what the policies are going to be, they really cannot do that.”

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