The new IRS bridge to nowhere – Scott Stewart
The Internal Revenue Service’s (IRS) plan for the “modernization” of the Income Verification Express Service (IVES) is unworkable, unreasonable, a violation of taxpayer privacy and a twisted interpretation of Congressional intent. If the plan is implemented, it will be the most expensive and least used Application Programming Interface (API) ever to be built.
Beginning January 2023 (unless Congress stops them), the IRS will require many Americans to go through the IRS before they can get a mortgage, personal or small business loan. Specifically, they will have to navigate the IRS.gov website or download an IRS app on their phone or computer, create an account, verify themselves via webcam or go into an office somewhere, permission their tax transcripts, fill out and provide their lender with a 4506-C form and then, and only then, will a lender be able to verify their income and process their loan application.
This is a big change that unnecessarily complicates how Americans apply for and receive loans because up until now, lenders were able to do all of this on behalf of the applicant, saving them considerable time and resources. This new burdensome requirement is also not what Congress intended for the IRS to do when it was tasked with modernizing the IVES system.
Here’s how we got here: Congress passed The Taxpayers First Act of 2019 which mandates that the IRS update its process to verify taxpayer information for Americans who want to get a loan. Currently the process by which lenders confirm income and tax payment information is via fax which can take days or weeks to complete.
Yes, a fax — straight out of the 1970’s.
The Taxpayers First Act required the IRS to develop an automated system for taxpayers to request, and the IRS to send, a summarized transcript of their tax returns to an authorized third party (i.e. government agency or lender). The goal was for the fax to be replaced by API technology, that can instantly and securely transfer data to lenders, or other government agencies with taxpayer permissions.
The intention would be for the IRS to develop a secure API that would afford lenders real time verification of income. Such a system would be a boon to borrowers, since it would speed up the loan closure process and dramatically reduce rates of fraud, allowing the lenders to reduce costs of borrowing for consumers and small businesses alike.
Additionally, the Taxpayer First Act authorized the IRS to levy fees on users of the current fax-based system to pay for such an API. To date, the IRS has collected $72 million from users of the system, which would make the IRS’s system the most expensive API ever built.
Moreover, the entire lending industry including banks, mortgage lenders, consumer and small business lenders have told the IRS that they will not require their customers to go to the IRS as a condition of getting a loan and therefore will not use this new system unless they return the responsibility (and burden) of customer verification to the lenders and remove the IRS from the process entirely.
The lending industry and consumer groups have been trying to work with the IRS for more than a year to implement an alternative solution that meets the requirements of Executive Order 13571 to streamline service delivery and improve customer service as Congress intended. The IRS has repeatedly said it won’t change course, and if lenders don’t like it, they can continue with the current fax-based method.
In fact, it now appears that all current users will not transition to the IRS’ proposed API, but rather continue to use the old fax system. I predict that few, if any, lenders of any kind will use the new system.
All of these details can get lost in the larger debates roiling Washington, DC these days. But most voters care about the economy and kitchen-table issues. Getting a timely mortgage in the current housing market environment of rising interest rates or having the opportunity to expand or protect a small business after the COVID-19 pandemic and looming recession are not small issues for many Americans.
Requiring borrowers to go through the IRS as a condition of getting a loan is one of the crazier ideas to come out of DC bureaucrats recently especially when Congress tasked them to modernize to make the process easier. There are faster, cheaper and more secure methods to build an API that allows for real time verification of income. The IRS can do better and it should. If it doesn’t, Congress should once again send a clear message to the agency: improve the income verification process as intended by law by making it faster, more secure, more efficient, and better for all Americans to access credit and to grow the U.S. economy.
How will the IRS explain to Congress or President Biden that they wasted $72 million dollars to build an API that no one uses?
They might as well build a bridge to nowhere.