Transforming The IRS Will Require More Than Additional Funding

IRS Commissioner Danny Werfel recently appeared at the National Association of Tax Professionals’ annual Taxposium conference via a recorded message. He wanted to thank the audience members for their “service to the nation” and their role in helping make the U.S. tax system work. He then spoke about the IRS Strategic Operating Plan and how the “adequate, stable, and long-term funding” provided by the Inflation Reduction Act would bring the agency back to a “historic baseline of service.”

Werfel did not, however, provide the year that was being used to establish that baseline. He spoke about the success of the recent filing season. He did not mention that 2023 was the first filing season in recent memory with no retroactive extensions of expired tax provisions, no pandemic-related assistance that required reconciliation on the tax return, and no immediate or retroactive changes to the Internal Revenue Code. Werfel further noted that during filing season the IRS answered 85% of its phone calls. According to a handful of sources in attendance when Werfel mentioned that statistic, laughter broke out in the room.

IRS Phone Service Remains Suboptimal

The 85% answer rate during the 2023 filing season represents a huge improvement over the IRS’ all-time low of 11% in 2021 and the 13% answer rate of 2022. Indeed, at times during the 2023 tax filing season, it appeared that calls to the Practitioner Priority Line were being answered promptly—or almost immediately. Sometimes there were no hold times at all.

Now, however, practitioners are once again experiencing long hold times (more than 30 minutes) or are on the receiving end of what the Service euphemistically calls a “courtesy disconnect.” Isabel Goldberg, a Hollywood, Florida-based CPA, has experienced both long wait times and the courtesy disconnect which left her wondering what happened to the option to be called back. The call-back option has been well received by the practitioner community, but its availability is at best sporadic.

I was told on a recent call to the PPL that after filing season, IRS representatives were taken off of the phone lines and transferred over to processing paper-filed returns. It is also possible that some of the representatives have been reassigned to answering phones for FEMA. IRS phone representatives are cross-trained to answer phones for FEMA in the event of a natural disaster.

Electronic Filing Remains Difficult Or Unavailable

Werfel’s recorded address also mentioned the Inflation Reduction Act funding was being used to roll out new tools for taxpayers and tax practitioners and promised “increasingly innovative ways” for taxpayers to file their taxes. This begs the question of whether or not more innovation is what is actually needed to improve the process of filing tax returns.

The IRS wants returns filed electronically, but that option can be difficult for many taxpayers and for different reasons. For example, some business taxpayers file their quarterly 941 returns (reporting payroll taxes and federal withholding for their employees) on paper because the setup process for filing these electronically is cumbersome and isn’t worthwhile for a return that is only reporting for one or two employees per quarter. It is easier (and in many cases cheaper) for really small taxpayers with only a handful of employees to file on paper rather than enduring the process to set themselves up for e-filing or hiring a payroll service to prepare and file the returns.

If the IRS wants taxpayers to file forms electronically then it needs to figure out a way for taxpayers to do so expediently and securely—time is money. But e-filing doesn’t necessarily have to be innovative to be expedient and secure; it could simply be more expansive. For example, the IRS could improve filing compliance by allowing e-filing of Forms 1040 that are more than three years old. Taxpayers who want or need to come into filing compliance are typically advised to file returns for the last six years plus the current year.

The IRS recently announced a “paperless processing initiative.” The fact sheet on the initiative says taxpayers will have the option to “go paperless” for IRS correspondence in time for the 2024 filing season and the IRS expects to achieve paperless processing for “all tax returns” by filing season 2025.

Nevertheless, the Social Security Administration often locks deceased taxpayers’ TINs well before the taxpayer’s final 1040 is due necessitating paper filing. Of course, even if electronic filing is only available to living taxpayers, any increase in e-filing options is an improvement—assuming taxpayers can be convinced to use the available options.

Automated Options Are Limited Or Not Truly Automated

The IRS once again providing an option for representatives to file authorization forms online received a great deal attention back in 2021. Unfortunately, while the forms can be submitted online, most are still being hand-processed in the order received (along with faxed and mailed-in forms). According to a recent Forbes.com article by Kelly Phillips-Erb, the IRS “cannot currently provide a timeframe for completion.” The same article reported amended returns (which for many tax years can now be filed electronically) can take more than 20 weeks to be processed because, again, they are processed manually.

Automation on the front end is not solving back-end processing problems and those issues are causing the refund delays, erroneous notices, and more. Tax practitioners have been asking for years for online means to respond to notices on behalf of clients. According to a recent IRS news release taxpayers now have the ability to respond online to notices, but tax practitioners are still waiting. And, again, all of these responses will be reviewed manually by IRS staff members—many of whom are probably still working on processing paper returns and electronically filed returns that require additional review.

The new paperless processing initiative announcement also indicated that by 2025 the IRS plans to use the new scanning equipment it acquired this March to immediately digitize paperwork submitted by mail or by fax. According to the fact sheet, the IRS expects 94% of individual taxpayers will no longer need to send mail to the Service. Once again, however, making electronic options available to taxpayers is not the same as convincing people to use them. One hopes that if the IRS builds it, the taxpayers will come. Nevertheless, if the promised improvements are implemented on schedule, they represent a huge step in the right direction for IRS customer service.

The IRS Loses Or Destroys Returns

I have had an IRS Appeals Officer instruct me to have a client file on paper even when the amounts being reported were zero. The client was asked to mail a quarterly Form 941 reporting nothing because the IRS lost several quarters of payroll reports for prior years and lost the faxed copies when the taxpayer called to fix the issue. The matter ended up being assigned to a Revenue Officer, then to IRS Appeals, and eventually to the Taxpayer Advocate Service when the taxpayer had to pay a representative (me) to handle the matter.

Once the issue (allegedly unpaid payroll taxes) ended up in my office it took more than a year to resolve. The IRS resolution included having the taxpayer find and mail new copies of the originally filed returns to the agency. The IRS has also been known to destroy copies of information returns including the widely publicized destruction of more than 30 million documents in 2022.

The improvements promised by the new paperless processing initiative hopefully will result in fewer issues like the one my client experienced. It is probably too much to hope such issues will ever be completely eliminated, especially in the short term.

Customer Service Seems More IRS-Focused Than Customer-Focused

When taxpayers respond to notices they often receive another automated notice weeks (or even months) later from the IRS saying, “we are going to take another 60 days.” Often this is followed by another notice that says the same thing. When the IRS issues an erroneous notice, however, it demands a response within 30 days—sometimes without providing a fax number or an address for a written response as was the case with the recent spate of erroneous CP-14 notices sent to filers in California. Many such notices only provide a phone number if the taxpayer has questions about the notice or disagrees with it. And even if the IRS is only answering 10% to 20% of its calls, the burden remains on the taxpayer to just keep trying regardless of the opportunity cost; or (if the taxpayer is paying a representative) the actual cost of making all those calls.

Further, taxpayers largely see the IRS as one big entity—and it is. But all too often IRS staff members that don’t work in service centers processing returns can lack awareness of or dismiss the deadlines that drive other parts of the service. A taxpayer or a taxpayer representative might be busy working on other deadline-driven work (or other paying work) when they make their requests. On the other hand, the IRS often seems to have the benefit of a virtually unlimited amount of time to deliver responses and refunds to taxpayers.

In the case of the “missing” Forms 941, the resolution paperwork from TAS was probably available around June 30. The case was resolved shortly before the second quarter closed. It sat in the AO’s office until the AO was ready to close the case in September, at which point the agency expected the matter to receive the taxpayer’s immediate attention. The AO’s suggested the taxpayer’s representative was expected to drop everything to help the AO close the case by obtaining additional compliance paperwork and signatures one week before the extended deadline for pass-through entity returns (September 15).

In another case, one of my clients who was in active collections called the IRS after receiving a notice to ask for more time to respond to a demand for payment. The taxpayer told the IRS phone service representative that she was represented in her collections matter and that I was actively working on her collections case but was out of the office for several days. The phone representative did not mark the account for additional time to respond and essentially demanded a response or that the liability be paid in a few days. That decision resulted in me lacking time to refamiliarize myself with the issue or to determine whether the taxpayer would suffer financial hardship by having to come up with a large sum of money in a such a short time. My client ended up making a large lump-sum payment because she felt bullied by the phone representative. She was afraid if she didn’t pay, she would make it more difficult for me to represent her in her ongoing collections case.

The IRS regularly makes unscheduled calls to taxpayers’ representatives, which can put them in a difficult position with respect to answering details about a specific case accurately. The idea of scheduling a phone call apparently seems strange to the agency, as does the idea of scheduling a visit. The IRS recently announced it was no longer “knocking on the doors” of most taxpayers in collections. While this was presented by the Service as a taxpayer-friendly initiative, the reality is that, even with all of its new enforcement funding, it probably doesn’t have the staff to send ROs out for garden-variety collections efforts and hasn’t for a long time now. Additionally, it begs the question of how effective any of these surprise visits could be. For many taxpayers, scheduling an appointment to sit down with a collections representative in a truly good faith effort to resolve the tax liability would be more effective—but such efforts can run counter to the prevailing IRS culture.

Commissioner Werfel’s recent efforts notwithstanding, many taxpayers’ interactions with IRS staff members leave them feeling browbeaten into compliance as quickly as possible while the Service simultaneously seems to have all of the time it needs to consider and resolve the same matter.

Issues Need True Resolutions

According to the IRS’ Taxpayer Bill of Rights, taxpayers have a right to “finality.” The right to finality, however, is highly specific: “Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.” While that certainly helps with some correspondence and audits, it’s hardly reassuring for many other taxpayer issues.

For example, although my 941 client’s immediate collections issue was resolved, the taxpayer decided (based on IRS recommendations) to continue to pay a contract bookkeeper to paper file “zero” returns to avoid the same issue recurring in the future. That doesn’t seem like true finality for taxpayers even if the IRS projects this as taking measures to protect them. It’s really taxpayers taking measures to protect themselves from the IRS and its computers failing to recognize or understand that a tiny business may only have one or two employees. Those employees may not work in every single quarter of the year. In other words, to prevent the IRS (and its computers) from misunderstanding, the taxpayer should file zero returns—never mind that the taxpayer usually has no filing requirement when there is nothing to report or remit and that the IRS in most cases discourages taxpayers and tax professionals from filing zero returns. (Covid-19-related economic impact payments being a notable exception for which the Service provided a specific non-filer tool).

In another case, a client is still waiting on the IRS to calculate an accurate balance due after her innocent spouse case was settled in Tax Court. The taxpayer received partial relief, the amount of which was determined by the court. The case settled in March 2022. The IRS is supposed to handle going back and applying the reduction in tax as of a specific date and then to apply payments made, recalculating penalties and interest along the way. It’s complicated and a bit tedious, but it’s definitely what the IRS does. After several erroneous balance due notices, I sent the case to TAS. The original TAS representative retired before the case closed and it went full “Groundhog Day” for several months. I finally managed to get the new TAS representative to understand the nature of the problem earlier this year. My next update on the case is due at the end of August. In the meantime, the taxpayer had her TY2022 refund offset (probably correctly), but she still does not know if the refund offset adequately covered any remaining balance due because the IRS is still trying to calculate it (all while penalties and interest on failure to pay continue to accrue with no indication that the request for penalty abatement is being considered).

The Future Of IRS Customer Service

According to a July press release: “Thanks to Inflation Reduction Act resources, the IRS delivered dramatically improved service in filing season 2023. IRS achieved an 87% level of service. Through the end of filing season, IRS answered 3 million more calls, cut phone wait times to three minutes from 28 minutes, served 140,000 more taxpayers in-person, digitized 80 times more returns than in 2022 through the adoption of new scanning technology, cleared the backlog of unprocessed 2022 individual tax returns with no errors, launched two new digital tools, and enabled a new direct-deposit refund option for taxpayers with amended returns. The IRS is continuing to build on this progress focusing on critical work across the agency in achieving world-class service, strengthening enforcement against high-income individuals who do not pay taxes owed, and modernizing core technology infrastructure to enable better service and improve data security.”

It is also true that this was one of the least eventful tax seasons in recent memory. Nevertheless, to outside observers the impressions remain that the IRS wants money, time, and taxpayer compliance while largely failing to perform its most basic functions: opening the mail, processing tax returns and getting them posted without losing (or destroying) them, processing representative authorizations promptly enough that representatives can timely answer taxpayer correspondence (even when the service expects, or demands, a virtually unlimited amount of time to issue its own response), and answering the phone.

The cases I am describing are anecdotal, but the frequency with which I deal with issues in my tiny tax practice likely speaks to a much more widespread problem. If I am seeing issues so frequently, the actual volume of cases for larger practices is probably much higher.

The IRS’ use of the additional funding it received from the Inflation Reduction Act to improve customer service is obvious. Werfel’s recorded message mentioned the agency had hired an additional 5,000 phone assistors. Additionally, the IRS is both reopening Taxpayer Assistance Centers and implementing help days for taxpayers who don’t live near a TAC. Perhaps, in the absence of another pandemic-level disaster and further large-scale changes to the tax code, the IRS can fulfill all of its promises to taxpayers before the tax changes in the Tax Cuts and Jobs Act sunset at the end of 2025. But given the practical realities the agency continues to face involving computer modernization and hiring staff, in addition to ongoing cultural issues at the Service itself, it seems disingenuous as well as premature to be boasting about victories, especially to a room full of tax professionals.