Last month, Congress passed the Inflation Reduction Act (IRA22), which provides the IRS with supplemental funding of nearly $80 billion over the next ten years. The legislation provides about $3.2 billion for taxpayer services, $4.8 billion to modernize the IRS’s information technology (IT) systems, and $25.3 billion to support its taxpayer service and enforcement operations.
In Part One of this blog, I described my recommendations to address the most time-sensitive challenge the IRS is facing – eliminating the paper processing and the overaged correspondence backlogs. In today’s post, I provide recommendations for longer-term initiatives the IRS should prioritize with its supplemental funding to improve the taxpayer experience. I have previously proposed most of these recommendations in my annual reports to Congress. As I noted in Part One, IRS leaders often tell us they agree with our recommendations in concept, but they lack the resources to implement them. With the supplemental funding it has received, these initiatives can now be undertaken.
I strongly recommend the IRS include the following initiatives in the operational plan the Secretary of the Treasury has directed it to submit within six months that details how the IRA22 funding will be spent:
1. Hire and train more human resources employees to manage hiring all IRS employees. Ironically, staffing shortages in the IRS’s Human Capital Office (HCO) is one of the biggest obstacles to hiring and onboarding more employees. HCO, which coordinates all IRS hiring, doesn’t have enough staff to review and approve new position descriptions, post job announcements, and screen incoming applications, and IRS divisions cannot hire employees even when they have funding to do so. Bringing on more IRS employees quickly is critical, particularly in the taxpayer service and IT areas.
Now that the agency has received additional funding, it should quickly bolster its HCO staff and, in the interim, provide creative alternatives, including providing the business units with the ability to do their own hiring so new employees can be selected, while also working to expedite security checks and the onboarding of new employees.
2. Ensure all IRS employees – particularly customer-facing employees – are well-trained to do their jobs. Getting through to a live IRS telephone assistor or having taxpayer correspondence processed quickly are important considerations, but the responding IRS employee should have enough knowledge to handle the question or issue properly, respectfully, and with a working knowledge of taxpayers’ rights. The combination of budget cuts and the COVID-19 pandemic has limited the IRS’s ability to provide adequate training to new employees and to provide regular updates and refresher training to its current workforce. Training must go hand-in-hand with hiring and continue throughout employees’ careers with the IRS, with a continuing focus on taxpayer rights. Doing work incorrectly can often be worse than not doing it at all.
3. Create robust and accessible online accounts with functionality rivaling the best financial institutions and through which taxpayers and practitioners can access, download, and upload all relevant information. Of all the steps the IRS can take to improve the taxpayer experience, creating robust online accounts should be a top priority and will be the most transformational immediate improvement the IRS can make. Most of us have been conducting business with our financial institutions digitally for two decades or more – paying bills, transferring funds, depositing checks, applying for loans, trading stocks and mutual funds, etc. While we occasionally still need to visit, call, or send correspondence to our financial institutions, online transactions have become the norm.
The IRS needs to offer online accounts with comparable functionality – the ability to file tax returns, make payments, view transactions, receive or view tax adjustment or other notices, respond to tax adjustment or other notices, upload and download documents, and submit questions or live chat with an IRS employee – which in most cases will eliminate the need for visiting, calling, or sending correspondence. And importantly, online accounts should be accessible for all taxpayers, including individuals, businesses, and other entities – and should provide practitioners the ability to access their client’s online information. Each year, practitioners assist a high percentage of taxpayers in resolving issues and encouraging voluntary compliance. Practitioner efforts are instrumental in effective tax administration.
4. Temporarily expand uses of the Documentation Upload Tool (DUT) or similar technology. The IRS has made it possible for taxpayers in some circumstances to provide requested information online rather than by snail mail. For example, an auditor requesting documentation to support a taxpayer’s business deductions or charitable contributions may provide the taxpayer with a link and passcode so the taxpayer can upload the documentation and not have to mail it in. Eventually, this functionality should be rolled into IRS online accounts. Until that happens, broader use of the DUT will reduce the burden on taxpayers and allow the IRS to resolve issues more quickly.
5. Improve the readability of tax transcripts. The IRS utilizes codes for various transactions, and these codes are included on the transcripts provided to taxpayers, their representatives, and anyone else authorized to receive them. However, the codes are not intelligible to the non-tax professional, and even tax professionals often struggle to understand them. The IRS should revamp the presentation of tax transcripts to substitute descriptions for the codes or at least to include a glossary on a separate piece of paper that explains – in plain English – what each code on the transcript means.
6. Enable all taxpayers to e-file their tax returns. Fortunately, over 90 percent of individual taxpayers now e-file their income tax returns. The bad news is that the IRS still receives millions of paper tax returns each year (about 17 million individual returns and millions of additional business returns last year), and only 66 percent of business returns are filed electronically. Some taxpayers prefer to e-file but may not be able to do so. This can happen if the taxpayer must file a form or schedule that IRS systems are not yet programmed to accept electronically, if a return is rejected by IRS’s systems for violating a programming rule, or if a taxpayer must attach documentation to the return (e.g., an appraisal or disclosure) and the tax software the taxpayer is using doesn’t allow for the transmission of attachments.
There are steps the IRS can take to address all three of these limitations. It can modernize its e-filing platform to accept all forms and schedules. It can accept and review returns that violate IRM systems’ programming rules (otherwise, the taxpayer whose return is rejected must file it on paper, requiring the IRS to transcribe it). And if some software packages allow taxpayers to submit attachments and others do not, the IRS can post a list of software packages that allow attachments online. That way, taxpayers with attachments will know which packages they can use to e-file their returns. If the IRS makes it possible for all taxpayers to e-file their returns, the e-file rate will continue to rise.
7. Automate the paper filing process and implement scanning technology to machine read paper-filed tax returns and correspondence. Although making e-filing possible for all taxpayers will help, some taxpayers will likely choose to file paper returns or have no choice but to file paper returns for the foreseeable future. The IRS must automate paper processing to increase efficiencies and move toward a paperless work environment, not only for taxpayers but for its employees.
Various forms of scanning technology are available that would allow the IRS to machine read paper-filed returns and reduce the need for employees to type data from the returns digit-by-digit into IRS systems. This will speed processing, reduce transcription errors, and reduce employee costs. Two of the leading technologies are optical character recognition and 2-D barcoding. Earlier this year, I issued a Taxpayer Advocate Directive to the IRS Deputy Commissioners directing them to implement scanning technology in time for the 2023 filing season. They did not commit to do so, so I recently appealed their decision to the Commissioner. You can find a blog detailing the issue and providing links to the source documents here.
8. Digitalize all paper, upload the data, and implement an integrated case management system so all taxpayer information is accessible in a single database. Discussions of case management systems can get very technical very quickly, but in simple terms, the positive impact on taxpayers and IRS employees of digitalizing paper will be huge. The IRS stores data on about 60 case management systems that generally don’t communicate with each other. If a taxpayer calls the IRS for information about an account issue, the IRS employee often must search multiple systems or transfer the taxpayer to a second employee and sometimes a third employee simply because the relevant data is not centrally accessible. Sometimes, this can affect tools like Where’s My Refund?, which pulls data from some case management systems but not others, and therefore may not provide taxpayers with much-needed up-to-date information.
A single integrated system, together with modernized Individual and Business Master File core components, would allow the IRS to provide taxpayers with faster and more complete service and would improve the efficiency of IRS employees. Moving away from paper files will also increase the efficiency of working issues, moving information from one part of the organization to another, and reduce the unnecessary strain on the system that paper files create. Various levels of “permissions” should be built into the system so that sensitive information would be accessible only by employees with a need to know.
9. Overhaul the IRS.gov website to make it more user-friendly. I recently issued a two-part blog detailing the inadequacies of the IRS’s website here and here. Unlike many internet search engines, the IRS.gov search engine doesn’t allow for plain language and doesn’t adjust for incorrect spelling or use/non-use of hyphens. The frustration is that the information does exist on IRS.gov; you just can’t get to it easily. It’s unfortunate but true that even many IRS employees find it more productive to use a commercial search and add “IRS.gov” to the search than to use IRS.gov itself.
10. Continue to develop and improve voicebots and chatbots. To its credit, the IRS has developed automated tools that allow taxpayers to pose questions and receive responses from “smart” bots. For example, a bot can walk a taxpayer through the steps required to set up a payment plan. The more these bots can be improved, the less frequently taxpayers will need to speak with an IRS employee to obtain answers. It is important to note that bots generally are not an adequate substitute for speaking with an IRS employee to address complicated or nuanced issues, but if the simpler issues can be effectively addressed through bots, employees would be able to spend more time assisting taxpayers who genuinely need their help. In short, bots can be an important addition to the IRS’s omni-channel approach to taxpayer service.
11. Improve transparency. The IRS needs to improve its transparency and provide clear and timely information about what taxpayers need to know. Unfortunately, during the past two filing seasons, times in which taxpayers desperately needed information, the IRS failed to provide weekly reports providing tax return processing timeframes so that taxpayers would know what to expect when they filed their returns or submitted correspondence. This lack of proactive transparency and timely information left taxpayers confused and frustrated, reaching for the phones, searching the internet, and looking to tax professionals for help.
12. Issue clear notices and IRS guidance. Notices are the primary vehicle by which the IRS provides taxpayers with information. Many notices sent to taxpayers contain critical information about issues, including statutory periods, reasons the IRS is holding a refund, and what a taxpayer needs to do to resolve an issue. Over the years, the IRS has improved the clarity of its notices. Yet some critical notices remain confusing and vague, and don’t provide taxpayers with adequate IRS contact information. In some cases, the IRS limits the number of characters and words in its notices.
Although there are legitimate reasons for limiting the text in a notice that the IRS must consider, it is essential and possible for the IRS to develop notices that are clear and concise. It is critical that taxpayers receive timely, complete, and accurate information, as the Taxpayer Bill of Rights recognizes that taxpayers have the right to be informed. Thus, it is imperative that the IRS be proactive in including vital information. In other words, if the IRS knows something, it needs to timely, accurately, and clearly say it. Failure to do so may well lead to more complications and problems for taxpayers, requiring additional time and resources by taxpayers, tax professionals, and the IRS to resolve them.
13. Increase Taxpayer Advocate Service funding. Although enforcement is a necessary element of a fair and voluntary tax reporting system, increased enforcement will cause challenges and problems for some taxpayers. In some cases, the IRS will take collection actions that cause economic hardship, leading taxpayers to seek Taxpayer Advocate Service (TAS) assistance to get levies released. In other cases, taxpayers may suffer a significant hardship as a result of the manner in which the IRS administers the tax laws, including enforcement actions or inaction on the part of the IRS, also leading to more TAS cases. TAS’s case advocacy operations are already stretched thin, and we will need to hire additional employees if the IRS ramps up its compliance activities, as that inevitably will lead to more TAS cases.
Lastly, the IRA22 contains a provision that directs the IRS to conduct a study on developing and operating a “free direct efile tax return system.” The study is to include an assessment of costs, taxpayer opinions based on surveys, and the views of an independent third party regarding the IRS’s capacity to deliver such a system. The IRA22 requires the report to be delivered to Congress within nine months. I strongly support providing taxpayers with more free options to prepare and file their tax returns. While many taxpayers will continue to use preparers or established tax software products, taxpayers should not be required to incur fees to comply with their tax filing obligations. A free direct efile tax return system will provide taxpayers with more options. I also believe that taxpayers should be able to timely access third-party information forms that the IRS receives (Forms W-2, 1099, and the like) and download that information into their tax software.
However, I remain concerned about proposals to create pre-populated returns that taxpayers would simply sign and submit. Tax liabilities are based partly on factors the IRS cannot know, including changes in a taxpayer’s marital status and changes in the number of dependents for which tax benefits are available. Rather than putting figures onto a prepopulated form and expecting the taxpayer to correct them, I believe it would be more appropriate for taxpayers to fill in those details themselves and be able to file electronically at no cost or use the return preparer or tax software package of their choosing.
The above list is not all-inclusive, but it summarizes many of the taxpayer service and IT recommendations our office has made to improve the taxpayer experience and protect taxpayer rights. With proper oversight, there is a lot the IRS can do with this additional funding to dramatically improve and revamp the taxpayer experience while protecting taxpayer rights. And as the IRS ramps up enforcement, we will be working closely with the IRS to ensure taxpayer rights as described in the Taxpayer Bill of Rights are fully respected.
I am eagerly envisioning the IRS of tomorrow, and I am excited to work with my IRS colleagues to bring the agency’s IT systems and business practices into the 21st century. I strongly urge the IRS to prioritize the improvement of taxpayer services above all else in the coming months, and I urge it to incorporate these 13 recommendations and the five recommendations I made in Part One of this blog into its operational plan.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.