IRS watchdog urges agency to provide more underpayment penalty relief

The IRS’s in-house watchdog on Thursday recommended that the agency provide more penalty relief for people who did not have enough money withheld from their paychecks throughout the year, as people file their taxes for the first time under President Trump’s tax law.

“I think the IRS should do whatever is within its administrative ability to provide relief,” National Taxpayer Advocate Nina Olson said at a hearing held by a House Ways and Means Committee subpanel.

{mosads}“If Congress could take some action on that … that would be excellent,” she added. “I just think that would calm everybody down.”

Trump signed his tax-cut law in December 2017; several weeks later the IRS issued new guidance to update people’s tax withholding from their paychecks. The withholding guidance reflects major provisions in the new tax law, such as the lower tax rates and larger standard deduction.

The Treasury Department has estimated that several million more taxpayers will be underwithheld this year due to the guidance, meaning that they will likely owe the IRS money when they file their taxes this year instead of receiving a refund. According to a Government Accountability Office report from last year, the Treasury Department estimated that 21 percent of wage earners will have a balance due for 2018, compared to 18 percent had the tax law not been enacted.

The IRS in January announced that it is waiving the underpayment penalty for some taxpayers. Normally, people wouldn’t owe a penalty if they made payments throughout the year of at least 90 percent of their tax liability; the IRS lowered that threshold this year to 85 percent.

But Olson encouraged the IRS to do more if they have the ability, given a high degree of uncertainty this year. She told reporters after the hearing that in the penalty area, the IRS commissioner “has very great discretion.”

Olson noted during the hearing that Congress’s 1986 tax-reform law included a complete waiver of the withholding penalty for taxpayers in the first filing season under that law, and that the 1986 law also required all taxpayers to submit new withholding forms to their employers. Neither of those were included in Trump’s tax law, though the IRS has encouraged people to use the agency’s online calculator and adjust their withholding.

Rep. Judy Chu (D-Calif.) said she has offered a bill to shield people from penalties for this year’s filing season as long as they paid at least 80 percent of their tax liability throughout the year. She said a version of her legislation was recently introduced in the Senate by Sen. Kirsten Gillibrand (D-N.Y.).

Olson also expressed concerns about the agency’s customer service during the first few weeks of this year’s filing season, noting a low level of service on the IRS’s phone lines.

Olson said the level of service on the IRS’s accounts management line through Feb. 23 was 57 percent, and IRS assisters answered only 18 percent of those calls. Both of those figures were significantly higher in the same period last year.

Olson said the decline in the IRS’s telephone service over the past several years has been “budget-driven,” and encouraged Congress to increase the IRS’s funding for taxpayer services.

“I am very concerned that the IRS, after years of not having adequate funding for taxpayer service, that it is at a point that it is stretched so thin that things could go very badly wrong or just simply that taxpayers will give up trying to reach the IRS and not get the assistance that they need,” she said.

Olson said that in the first four weeks of the filing season, the number of tax returns received, the average refund size and the percentage of taxpayers receiving refunds was comparable to past years. She said it’s “too soon” to provide a full assessment of the filing season, because the filing season has been only partially completed.

The hearing came after Olson announced last week that she’s going to retire on July 31, after serving as National Taxpayer Advocate for 18 years. Lawmakers on both sides of the aisle praised Olson for her work helping taxpayers.

“You’ve been so helpful over the years,” said Rep. John Lewis (D-Ga.), the chairman of the Ways and Means subcommittee that held the hearing.

“You have been an incredible champion of hard-working American taxpayers,” said Rep. Mike Kelly (Pa.), the top Republican on the subcommittee.