Could a spike in IRS budget solve income-verification problems?

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WASHINGTON — Financial services groups are urging lawmakers to support funding for the Internal Revenue Service for technology upgrades that could fix flaws in the agency's system for verifying the income of mortgage applicants.

Acting IRS Commissioner David Kautter has asked Congress for $397 million to implement the new tax reform law, including $291 million to update the agency's aging information technology systems. Those systems have been blamed for a slowdown in the Income Verification Express Service, which lenders fear could lead to long delays in processing mortgage applications during peak periods.

The Treasury Department wants an increase in the IRS budget to help implement the new tax law in a more expeditious manner than the IRS's current systems would allow. But industry advocates hope the funding push will also benefit the IVES system.

"They desperately need it, not just for IVES but across the board. All of their systems are very old. They need it for efficiency and security," said Anne Canfield, executive director of the Consumer Mortgage Coalition. She added that she expects some of the $291 million to be used for IVES.

Key lawmakers appear to agree with the IRS's general funding needs.

"The IRS is still using computer software that is older than most of my committee staff. And, you can take a look at them — they’re not all millennials," Senate Finance Committee Chairman Orrin Hatch said at a Feb. 14 hearing.

"The administration, in its budget, has proposed additional cuts to funding for the IRS. I think that is a mistake," Hatch said at the hearing.

In a joint Feb. 14 letter to Hatch and other lawmakers, several trade groups from the banking, mortgage and construction industries said providing funds to fix the IVES system is better than "the patchwork solution that is now in place" that "could be overwhelmed, delaying mortgage closings for American homebuyers."

"Rather than continuing with patchwork solutions to plug holes in an outdated system, there is a critical need to provide sufficient funds to upgrade this system, which is critical to the IRS and a major segment of the U.S. economy," according to the letter, signed by the Consumer Bankers Association, Consumer Data Industry Association, Consumer Mortgage Coalition, Housing Policy Council of the Financial Services Roundtable, Mortgage Bankers Association and the National Association of Home Builders.

In a statement Thursday, the MBA said, "We support increased funding for IRS and look forward to working with the IRS to ensure that the IVES System — which facilitates millions of mortgage transactions each year — is a priority in their technology plan."

When asked about the funding needs for IVES, Hatch's press secretary, Katie Niederee, said the senator is familiar with the industries' request.

"Chairman Hatch is aware of the concerns and is discussing the best path forward with the Internal Revenue Service," Niederee said in an email.

The IRS modified IVES late last year to require multifactor authentication to check a user's identity and protect taxpayer data.

But the system that IRS rolled out wasn't designed for validating tax information or large volumes of mortgage applications, according to Pete Mills, senior vice president of residential policy at the Mortgage Bankers Association.

"They rolled it out with very little advance notice to industry," he said in an interview. "There were some glitches in the process and that is when things ground to a halt."

The IRS has patched the system up and it's working now. But IVES is "barely meeting minimum needs," according to Mills. "Lenders have to process applications in large batches and the IRS system currently isn’t really designed for that," he said.

"Lenders need a longer-term solution," Mills said, adding that that solution should allow for authentication and income verification during high-volume periods when lenders are handling thousands of applications a day.

"We have their attention and I think they are working with us to prevent another halt" in loan processing, Mills said. "But this is a longer-term issue — it will probably require additional funding in 2019 as well."

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