Retiring National Taxpayer Advocate Nina Olson took a parting shot at the IRS in her final report, taking the agency to task over its level of taxpayer service and its overall strategy for assisting taxpayers.
The IRS’s level of taxpayer service remains “woefully inadequate,” Olson said in the Taxpayer Advocate Service annual report to Congress, released June 20.
According to the report, the IRS answered only 25 percent of taxpayer phone calls overall during the 2019 tax filing season, with an average wait time of 13 minutes. For calls on the balance due line, the IRS answered just 24 percent, with hold times averaging 49 minutes. Olson said the latter is particularly problematic because taxpayers use that line to set up payment arrangements when they’re unable to fully pay their tax liabilities.
She also argued that the IRS continues to use misleading metrics for measuring its level of taxpayer phone service.
Officially, the IRS had a 67 percent level of service for phone calls in the 2019 filing season, down from 80 percent the previous year. But according to Olson, that metric doesn’t actually reflect the number of phone calls answered; rather, it counts the number of calls answered that were routed to live telephone assistance, not all calls seeking telephone assistance on the line.
Only 40 percent of calls to the accounts management phone line — the main taxpayer service line — are routed to a live assistant, the remainder are routed to an automated system. That’s a decision made by the IRS phone system, not the taxpayer making the phone call, and most taxpayers are calling to speak with an IRS employee, Olson explained.
The discrepancy between the official statistics and the actual results demonstrates the need for a more transparent performance measure, according to Olson.
The TAS report is the first of three volumes. The second volume will include the IRS’s responses to TAS’s 2018 recommendations, and the third will feature an assessment of ways to improve the earned income tax credit. The second and third volumes will be released in July.
In a statement, the IRS acknowledged Olson’s “important role in our tax administration efforts” and said it would closely review the report.
Customer Service Complaints
IRS taxpayer service levels fall far short of the customer service benchmarks put forth by the Trump administration’s 2018 President’s Management Agenda, which called for “federal customers” to receive an experience comparable to that in the private sector. Olson cited analyses from two independent customer satisfaction surveys, both of which ranked the IRS among the worst-performing federal agencies.
On top of these poor results, Olson noted that the Trump administration’s fiscal 2020 budget proposal allocates more funding for tax enforcement while cutting funding for taxpayer services, which she likened to “robbing Peter to pay Paul.”
Olson acknowledged that budget constraints have limited the IRS’s ability to improve its taxpayer services, but argued that “the IRS should not blame Congress for a lack of taxpayer services funding when it is itself proposing to shift funding away from taxpayer services.”
The recently passed Taxpayer First Act of 2019 directs the IRS come up with a comprehensive taxpayer service strategy within a year, a requirement that the IRS should consider “an opportunity to think creatively about better ways to truly put ‘taxpayers first,’” Olson said.
Olson also criticized the IRS’s “Future State” initiative, which largely revolves around expanding online self-service resources for taxpayers to use to answer their questions. That may be a less costly approach for the IRS to expand its taxpayer service offerings, but the approach “flies in the face of a significant body of data that indicates that customers . . . clearly prefer human, personal interaction for many transactions,” she wrote.
Man, Not Machine
Every interaction with the IRS “has the potential to be anxiety-inducing,” according to Olson. She recommended the IRS employ the “Taxpayer Anxiety Index” developed by TAS to determine how it interacts with taxpayers in different situations.
Under that index, taxpayers should have greater access to person-to-person interaction as the potential for a given interaction with the IRS increases anxiety. If refunds get slowed down because of identity theft prevention practices, taxpayers might be willing to first check the status of their refund online or via a mobile app, Olson wrote. But when the refund gets stopped because of multiple delays, their anxiety increases dramatically, and they are more likely to want to speak with an IRS representative to get answers, she continued.
Pushing taxpayers toward online applications in the latter case exacerbates anxiety, which decreases trust in the IRS and ultimately increases noncompliance, Olson wrote.
A Tale of Two Thresholds
The IRS had a “generally successful” 2019 filing season despite multiple challenges, like the 35-day partial government shutdown just before the start of the filing season and numerous provisions in the Tax Cuts and Jobs Act taking effect for the first time, according to the report.
The IRS also properly recognized the difficulty many taxpayers would have in accurately estimating and withholding their tax liabilities under the new tax regime but failed to respond effectively or fairly, Olson wrote.
The agency announced in January that it would waive underpayment penalties for taxpayers who paid at least 85 percent of their total tax liability, but, under pressure from Congress, toward the end of March, it expanded that grace threshold to 80 percent.
“While this lower threshold is appreciated, it treats similarly situated taxpayers differently,” Olson wrote, observing that some taxpayers who had already paid estimated tax penalties based on the less generous threshold were instructed to file a form requesting a refund of the overpaid funds.
Forcing taxpayers to file a form, which cannot be filed electronically, in order to receive their refund, was unfair and unnecessary, Olson wrote. In practice, it has resulted in just 6 percent of eligible taxpayers claiming their refund, per an April report by the Treasury Inspector General for Tax Administration, which suggests the process was “too burdensome or not communicated effectively (or both),” Olson wrote.
Olson said that TAS recommended that the IRS systemically waive the underpayment penalty for eligible taxpayers, but the IRS declined to do so, replying that it would require “extensive programming/testing of its systems.”
TAS will continue to press the IRS to “proactively abate any estimated tax penalty assessed on taxpayers . . . without any action required by the taxpayer,” Olson wrote.
Nonprofit Noncompliance
The report also contended that the agency continues to grant tax-exempt status to organizations that don’t deserve it, despite revising its streamlined exemption application to obtain more information from applicants, the report said.
In 2018 the IRS, responding to a directive from Olson, revised Form 1023-EZ, “Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” to require applicants to include brief narrative statements of their activities.
However, the IRS does not require applicants to submit their original or amended organizing documents, according to TAS. As a result, the agency is not ensuring that organizations take corrective action even when their narrative statements suggest their applications are defective, the report says.
TAS also found that despite IRS educational efforts, predetermination reviews, and audits, many Form 1023-EZ applications are still approved erroneously, in part because the IRS has shifted resources away from audits to address an exemption application backlog.
After reading the report’s Form 1023-EZ findings, Charles M. Watkins of Webster Chamberlain & Bean LLP said Form 1023-EZ filers should be required to upload their governing documents.
They also should have to upload a separate statement of proposed activities (not limited to 255 characters, as the existing narrative statement is) and estimated budgets for the first three fiscal years, said Watkins, who has criticized the short form for not seeking more information about applicants’ planned activities.
Additionally, Watkins said the audit selection process for applicants that filed Form 1023-EZ should consider the extent to which annual revenues reported on Form 990-EZ or Form 990 exceeded $50,000. Organizations with annual gross receipts above $50,000 may not use Form 1023-EZ.
“An organization that receives annual revenues of $75,000 may not have anticipated the excess, but one that receives annual revenues exceeding $250,000 may have a perjury problem unless it can show why those revenues weren’t anticipated when the Form 1023-EZ was filed,” Watkins explained.
On the other hand, if the audit reveals evidence that the signing officer committed perjury, “I don’t know that the IRS could revoke the exemption merely for that reason — assuming the organization is otherwise in compliance with section 501(c)(3),” Watkins added.
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