Tax Compliance During the Partial Government Shutdown

Alexandra Piechowicz

Associate Editor

Loyola University Chicago School of Law, JD 2020

On December 22, 2018, for the third time in a year, the United States government shut down. Almost two years into his presidency, President Trump, feeling pressure to accomplish one of his many promises from the campaign trail, requested $5.7 billion from Congress to fund his proposed wall at the border of the United States and Mexico. Following negotiation efforts by Senate Democrats, the standoff between the President and the Senate ended in a financial default, triggering a partial shutdown. The shutdown became the longest in U.S. history on January 19, 2019, beating the previous 21-day record set by the 1995-1996 shutdown. The shutdown left an estimated 380,000 government employees locked out of work without pay and an even greater 420,000 employees working for no compensation at all, including employees of the IRS. With one of the United States’ most important governmental bodies being almost completely stalled by a lapse in funding, it begs the question: what happens to taxes during a shutdown?

History of Government Shutdowns

The first historic shutdown occurred in 1790 due to the restructuring of bonds issues to fund the Revolutionary War The government “shut down” again in 1933 when Congress made it illegal for creditors to demand gold as payment. However, the first modern government shutdown did not occur until 1976 under President Ford

Every year in the United States, Congress passes budget legislations for the following fiscal year. Each of the twelve appropriation bills must be signed by the President. If the bills are not signed by a certain deadline, the government shuts down, ceasing all non-essential activity until an agreement is reached.

Since 1976, there have been twenty one gaps in funding for the United States government. Notably, eight of these shutdowns occurred under the Republican Reagan administration while Democrats held control of the House. Conversely, the longest shutdown prior to the shutdown of December 2018 lasted twenty-one days and occurred under the Democratic Clinton administration while Republicans held control of the House.

Non-Essentiality of the Internal Revenue Service

While mandatory services such as Social Security and the postal service continue to function during this time, the Internal Revenue Service (IRS), a significant body under the Treasury Department, furloughed a significant portion of its employees. In other words, 86,000 IRS workers were placed “in a temporary status without duties and pay because of lack of work or funds or other non-disciplinary reasons.”

During a shutdown, United States taxpayers can expect little to no response from the IRS to their inquiries. The Service will not process any paper returns unless they contain remittances. Additionally, audits and examinations are halted as well as all nonautomated collections. All IRS offices are closed, and all administrative functions are suspended.

What It Means for Taxpayers

On January 25, 2019, President Trump announced a deal to temporarily reopen the government for three weeks, however, the IRS has shown little optimism. IRS personnel members have told lawmakers that returning from the shutdown will leave the Service overwhelmed with millions of unanswered taxpayer letters, in desperate need of new employees for the upcoming tax season, and several weeks behind on its training schedule for workers that have already been hired. Government watchdog groups estimate that it will take at least a year for the Service to recover from the shutdown and that is only assuming that the government does not shut down again in three weeks.

The IRS maintains that the tax filing season commenced as planned on January 28, 2019. However, this could spell disaster. All staff that normally answer tax filing questions and provide support services during filing season will not be working. While Americans will be able to file their taxes, any difficulties and confusion they may encounter will not be resolved, which could prove especially problematic given that this is the first year that the new tax code will be implemented.

In mid-January, 46,000 IRS employees were recalled back to work to process refunds and to accept phone calls. That number, while seemingly high, is still only about 12 percent of total IRS staff. Since the Service is expecting to commence filing on schedule and is encouraging taxpayers to file their returns online, taxpayers should expect to file their returns before the deadline on April 15, 2019 in order to avoid penalties. However, because taxpayers will not be able to seek guidance from IRS personnel, mistakes will be rampant. Errors on tax returns, as well as staff shortages, will slow down processing and are likely to further defer refunds.

“Shutdown” Compliance in Other Contexts

Filing tax returns in a timely manner despite the government shutdown is just one way in which citizens must comply with the Internal Revenue Code (IRC). However, others are subject to fulfilling federal obligations in other ways. In the United States, employers use E-Verify, a web-based system authorized by Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (IIRIRA), to confirm their employees’ employment eligibility. During the process, employers create files based on the information on employees’ I-9 Employment Eligibility Verification forms. E-Verify compares the information to Department of Homeland Security and Social Security Administration records. The employer receives a response within seconds that either confirms the employee’s eligibility or indicates that further action must be taken.

When the shutdown began, E-Verify was unavailable, however, employers were still require to comply with the requirements set forth by the U.S. Citizenship and Immigration Services, which included continuing filling out the Form 1-9. Once the shutdown temporarily ended, employers’ E-Verify requirements resumed and employers had until February 11, 2019 to submit any Form I-9s that were filled out while the system was offline. Noncompliance could result in civil fines and/or criminal penalties, prohibition from participating in government contracts, and court order requiring payment of back pay to the individual discriminated against or requiring the employer to hire the individual discriminated against.

The Big Picture

File your taxes on time and do not expect extensions regardless of when the shutdown permanently ends. The IRS has displayed confidence in meeting their deadlines regardless of the problems that may arise from being understaffed and complying with new Federal income tax regulations. However, it is unclear whether you can expect your refund to be processed in a timely manner. While the government is unable to uphold its end of the bargain in punctually passing budget legislation, it has made it clear that its citizens should uphold theirs on every end regardless of how burdened they are by the shutdown and its aftermath.