In my written testimony for a recent hearing before the Ways and Means Subcommittees on Select Revenue Measures and Oversight about the tax gap, I discussed some of the current state of taxpayer service at the Internal Revenue Service (IRS) and the many causes for refunds being delayed in the processing of tax returns. In a normal filing season, refunds may be stopped because of suspicion of identity theft, or omitted or understated wage income or overstated tax withholding. They may be stopped for “math error” processing for any number of reasons, including incorrect social security numbers. As the National Taxpayer Advocate, I regularly focused (here and here) on the high “false positive rates” of these programs. That is, the IRS froze many more returns that ultimately turned out to be legitimate refund requests than were fraudulent. For example, for the 2020 filing season, the National Taxpayer Advocate reported that IRS refund fraud filters froze 3.2 million individual income tax returns on suspicion of refund fraud. Of those 3.2 million refund suspended returns, 66 percent – almost two-thirds — were false positives, meaning they were legitimate refund requests. (See footnote 19 in NTA report.) For a quarter of the frozen returns, it took the IRS longer than 56 days to release them to normal processing.
This year is a far from normal filing season. The IRS is grappling with reconciling various new provisions including the Rebate Recovery Credit, exclusion of unemployment benefits from income, and the “look-back” provision for the Earned Income Tax Credit. These provisions have resulted in many more returns being suspended and requiring some form of manual review before processing, posting, and refund issuance can resume.
read more...The National Taxpayer Advocate has reported (Figure 2, Filing Season Report) that for Filing Season 2021, through May 21, 2021, the IRS received 148 million individual income tax returns and processed 135.7 million such returns. The remaining 12.3 million were stuck in various stages of review. This number under review is almost twice the number of returns unprocessed at the end of the 2020 filing season (6.3 million were suspended as of July 15, 2020). Elsewhere, the National Taxpayer Advocate has reported that as of May 21, 2021, the IRS had over 35 million individual and business tax returns either suspended or “in process” but requiring manual processing before the return can move along and refunds issued (Figure 3, Filing Season Report).
Included in these “frozen” returns are 9.8 million individual tax returns sitting in the Error Resolution System (ERS), up 544 percent from the 2020 filing season, and 2.1 million individual income tax returns still suspended for Identity verification, up 91 percent from the 2020 filing season. Trying to get through to the IRS to resolve these issues is nearly impossible. During the 2021 filing season, the IRS received 167 million calls on all its lines, up 294 percent from the year before; only 15.67 million of those calls reached a live assistor. On the 1040 phone line, which is the main phone number for individual income tax assistance, the IRS received 85 million calls, up 978 percent from the 2020 filing season, with only 3 percent reaching a live assistor. (Figure 5, Filing Season Report.)
If a taxpayer’s refund return is selected for identity verification (on suspicion of identity theft), the taxpayer is required to verify their identity through an online tool, or by telephone, or at an appointment at the Taxpayer Assistance Center (TAC). Taxpayers have reported being unable to verify online, unable to get through to the phone verification system, unable to reach the TAC appointment line, and if they are able to get a TAC appointment, it is 9 weeks later. The phone identity verification line received over 6 million calls this filing season, with a 19 percent level of service, meaning 4 out of 5 calls could not get through to verify their identity and get their refund released.
What can be done to fix this? First, technology, artificial intelligence, and data science can play an important role. Many of the IRS’ fraud detection and questionable refund filters are rule-based. That is, a fixed rule is broken, then a return is selected and must be manually reviewed; often the taxpayer must supply additional information. From year to year, the IRS does not do a good job of learning from the cases where its filters incorrectly identified a return. The IRS needs to work with data scientists and artificial intelligence experts to design a fraud/error detection system that is not rule-based but rather learns from the returns that actually turned out to be fraudulent, as well as those that were frozen and ultimately determined to be legitimate. In short, IRS systems need a continuous feedback loop so it minimizes the false positive rate and improves on its initial selection of returns. To date, the IRS has refused to set goals for reducing the false positive rate on its fraud detection system. The data cited above show the urgent need for the IRS to set these goals and act on them. Congress should require it to do so.
Second, the IRS can use programming to minimize taxpayer errors. In the 2009 filing season, in which taxpayers were reporting the Economic Stimulus Payments (ESPs) they received in 2008, the IRS had a system by which taxpayers (and their preparers) could look up the amount of ESP they received. The IRS did not replicate this system for the 2021 filing season. Thus, according to the National Taxpayer Advocate, 5 million returns were suspended in Submission Processing to reconcile Economic Impact Payments with Rebate Recovery Credits. For the 2022 filing season, Congress should require the IRS to create a similar look-up system for the Advanced Child Tax Credit; otherwise we will have the same return backlog in 2022 as we have today.
The IRS also could program, as part of the submission processing pipeline, the ability to systemically look back to the 2019 modified adjusted gross income, where a taxpayer claimed the “look back” rule for EITC eligibility. Instead, millions of returns were suspended for manual review because the IRS did not program this. While I realize this may not have been possible for the 2021 filing season, given the late enactment of the look back provision, if Congress makes the EITC look back rule permanent, it should require the IRS to systemically check for eligibility. This approach not only reduces the number of returns that must be manually verified but will also identify returns on which the look back was not but should have been claimed.
On top of all this, the Taxpayer Advocate Service (TAS) has at the top of its homepage on its website a statement as follows: “Refund Delayed? Our ability to help may be limited.” TAS is supposed to be the safety net for taxpayers experiencing significant hardship; yet TAS is unavailable for most taxpayers experiencing refund delays this year. This is unacceptable, and a violation of the right to a fair and just tax system. I do not know why TAS has decided it is unable to help these taxpayers; what I do know is that taxpayers are losing faith in TAS.
Third and most importantly, the IRS taxpayer service functions need a significant and steady funding increase. Congress should scrutinize the IRS projections for the number of calls it receives. When refunds are frozen, online services are just not satisfactory; taxpayers want to talk to a live human being. Congress should require the IRS to tell it how many assistors will be required to answer 85 percent of the calls coming in. Congress should require the IRS to project how many returns it expects to suspend for identity theft and questionable refund issues, and what level of staffing it needs in ERS and the identity theft/refund fraud units to resolve those issues within 14 days. Congress should require the National Taxpayer Advocate to project the number of cases they would receive if they were willing to assist taxpayers with refund issues. With all of this information, Congress can then appropriate the funds necessary to get staffing levels up in all these functions so U.S. taxpayers get the assistance and service they deserve.
These are resolvable problems. The Commissioner regularly points out in oral testimony that Congress only appropriated funding for a 60 percent level of service in FY 2021. What the Commissioner omits saying is that the President’s budget for that year only requested funding for that level of service. (See page 85 of FY 2021 President’s Budget Request for Treasury here.) Thus, Congress funded 100 percent of what the President/IRS requested. So, to start transforming taxpayer service, the IRS must be transparent about the abysmal quality of service it is currently providing taxpayers and provide Congress with a budget request that reflects the level of service taxpayers need to comply with the tax laws. No more of this 60 percent nonsense! Then, as Michelle Singletary wrote in her recent column, the IRS will be able to pick up the damn phone.
Not coming to the office has destroyed IRS. Working from home is a farce. Shame on the CIR and all of management. A year to process a return?
To date, the IRS has refused to set goals for reducing the false positive rate on its fraud detection system as well as other important IG recommendations. This is on purpose. Many dollars are laundered through this captured operation. Although the data cited above show the urgent need for the IRS to set these goals and act on them, until the oversight is given some teeth, nothing will change. The existing tax statutes already require it to do so. Why does anybody think that passing a law to force an entity to follow the existing law is the solution? The IRS must be transparent about the abysmal quality of service it is currently providing taxpayers. It is really a true reflection of the greater problem. The agency must follow the law as it is written; especially including Treasury Decisions:
TD1928, TD2815, TD2313, TD2988, TD2401 and TD6500.
If only insisting that the IRS pick up the damn phone would solve the taxpayer assistance problem. The truth is most “assisters” cannot do the job they are tasked with because of deviant agency policy, lack of proper training, hiring of under skilled and under qualified workers, extreme limited access to taxpayer accounts or all of the above. In reality, this captured agency is under performing precisely as the leadership wants it to in spite of all hullabaloo and Inspector General recommendations. It would be laughable if it wasn’t so tragic. Any other non-government company operating like this would be eaten alive in the real business world. In fact a tax processing service called Canopy is already a formidable challenger. It should replace the entire IRS as a national taxpayer service. The only advantage the IRS has over Canopy or other more competent services is its monopolistic access to taxpayer records and the ability to bypass constitutionally protected rights in order to take what it claims you owe without hard evidence or a judge’s signed warrant.
More funding is critical and will help, but even all the money in the world won’t be enough to make the IRS “half-functional.” The IRS needs a complete overhaul of its culture and employee base. I have no idea how one would even start with that. Hiring AI engineers? Sure, the IRS could certainly use all the qualified AI help that it could find. But, even Big Tech finds it hard to hire qualified AI engineers, notwithstanding $400,000 packages for 30-years-old coupled with the opportunity “to work as they please” solving cutting-edge problems. Admittedly, there are still a few qualified people who want to shape public policy and work for the greater good. But these rare folks have options that are way more appealing than working at or with the IRS.
I just had a conversation yesterday with a colleague of mine regarding the same topic. I expressed that I wanted to email the commissioner on the same subject. I was going to prepare the email today. Nina Olson basically wrote the email for me. It is a sin that a taxpayer that has filed the same tax return with the same preparer for 10 years gets an integrity unit letter and could not complete online and then calls from my desk and is being questioned by the IRS. And he gets nervous and does not understand the questions. Such as “what is your income?”. And then does not try to help the taxpayer simply by asking about a line number on a page number. No, instead the taxpayer is told they have to go to the nearest IRS office. It gets worse. a taxpayer gets a bill today for 2020. The tax is higher than what is reported on the tax return. Hmm, Why? Because he hasn’t been credited yet for the unemployment adjustment. Another TP gets a bill because he is not being credited for the 8915-E. How about next year when the taxpayers do not have the correct amount of Advance CTC??
Did the IRS even ask for 100% funding? The 60% request came from Mnuchin – and by association, Rettig. Politics?
About 3 weeks ago (today is 07-14-21) I called PPS to see if I could get my clients’ tax return and my tax return off dead center. To end the conservation I asked if the IRS was still working 1/2 staff. He said “half”! He said on the floor I am on there are only about 10 of us working. I asked how many would be working normally on your floor – about a 1000? His answer was, yes, about that. The rest were working from home. Problem about half of the working from home people aren’t even working and the half that are working from home are at about 10% efficiency. The pandemic is over. Why are these people still told to stay home. Get vaccinated. Put on a mask, two if you think you need two, and go to work!
All above have excellent points. I would add that the key driver of the agency’s problems is that IRS upper and middle management is dominated by IRS Careerists. People dedicated to spending the maximum amount of money on projects that require the least amount of effort on their part (the low hanging fruit), while being sure to follow the letter of the law. They will claim they are promoting the efficiency of the service and taxpayer compliance, therefore they must have a bigger budget to work with next year, and of course a promotion. After all, they carried out the letter of the law and executed the mission.The front line workers are left to pick up the pieces and bear the brunt of taxpayer ire. Will a bigger budget fix the problem of agency mismanagement? No. The agency needs new leaders. The taxpaying public deserves better.
Also, many people like to compare the agency to a business. In my experience a more fitting comparison is to a general contractor about to remodel your home. And not just any contractor, he’s the only one in town. The general contractor comes out to look over your place and gives you an estimate for supplies and labor needed. You then proceed to hand him a check for the full amount before any work begins. For the benefit of those of you who have never had this experience, 9 times out of 10 you will be calling him to ask when will work begin. And once work starts, calling constantly to ask how much longer until the job is finished.
I’ve actively participated in practitioner-IRS liaison activities at the state, regional, and national levels for over 40 years. I never imagined that things could get this bad. I suspect that, to a large extent, this current crisis has resulted from the 30-year concerted efforts by certain factions in Congress to underfund the IRS. Even if the current administration’s proposals for long-term increases in IRS funding could be passed [and not reversed by subsequent administrations or Congresses], I’m afraid it might take 5-10 years to create the kind of IRS that Nina envisions. The hiring and training challenges are enormous. I hope Chuck Rettig can get the needed resources and start turning things around.
Ron Wiener