Breaking the IRS Machine: Millions of 2020 Amended Returns

Fun fact: the top half of the IRS logo is the "IRS Eagle",
which I initially thought was an image of a forlorn
taxpayer dropping a return into a mailbox.

Just two days ago we wrote about how the IRS is buckling under the physical pressure of the COVID-19 lockdown and the systemic pressure of administering benefit payments and tax law changes.

With the prospect of re-opening becoming ever more real, and new tax legislation, if any, usually occurring in the fall, one could well hope that the IRS will have a "normal" tax season and spend the rest of the year fixing its problems. But one would be wrong. [bold added]

Congress is about to change a piece of the tax code affecting the returns being filed by as many as 40 million Americans—a month after the tax-filing season started.

The move, approved by the Senate on Saturday and headed for House passage on Tuesday as part of the coronavirus-relief bill, would exempt the first $10,200 of 2020 unemployment benefits from income for households that made under $150,000. That could save households about $25 billion, but implementing the change would be a challenge for the already-burdened Internal Revenue Service, and it could lead to unusual disruptions.

As of late February, the IRS had already received more than 45 million tax returns, some of which will now likely have to be amended. And the IRS will need to reprogram its computers to include the new, retroactive change as people file returns to take advantage of it. That is happening during an already messy tax season complicated by the coronavirus pandemic, remote work and a pile of other tax-law changes.

Retroactive changes to tax law, even well-intentioned, are enormously disruptive.

There are often ways to achieve the same financial effect without resulting in millions of past-year tax returns being amended. For example, Congress could have authorized an additional payment of, say, 10% in 2021 to compensate taxpayers for the taxes they would have to pay on their 2020 unemployment benefits.

The impetus towards big government seems unstoppable, and the least that politicians can do is to make sure that the machinery of government is working well. In the case of the IRS, the machine is broken (my mother, like millions of others, still hasn't had her 2019 return processed), and Congress keeps adding to the load.