The voices of Tax Policy Center's researchers and staff
The beleaguered IRS has two enormous challenges: It must rebuild its reputation to win congressional support for the funding it needs to do its job. And, because it will never get all the money it needs, it must spend the dollars it does have more wisely. It can start by improving the way it communicates with taxpayers, and doing it in a way that can save the cash-strapped agency a few dollars.
In her recent report to Congress, IRS Taxpayer Advocate Nina Olson suggests one such reform that could pay big dividends: The agency could fix the way it does letter audits. These reviews, which the IRS calls correspondence examinations or corr exams, are by far the most common way the agency resolves disputes with taxpayers. In 2013, the agency did more than 1 million of them, about three-quarters of all its audits.
These letters to taxpayers normally request additional documentation supporting deductions, clarifying income, and the like. Many queries can be resolved relatively easily, often by the taxpayer sending in some additional paperwork. The problem is the agency does not assign a single staffer to each case.
The system works like this: If a taxpayer responds to an IRS letter with a phone call (as many do), it is randomly assigned to an examiner by an automated routing system. So far so good.
The problem comes if you need to make a second call to, say, clarify a request for information. That’s pretty common: More than 60 percent of taxpayers faced with letter audits contact the IRS at least twice. Your call is again automatically routed to the next available staffer. Thus, chances are your case will be assigned to someone entirely new. You can insist on talking the examiner you started with, but you may have to wait three days to get your call returned.
In practice, that often means you start all over again. The taxpayer is frustrated. And the IRS ends up spending more time and money resolving the case.
The second examiner is supposed to have access to your case information, including any documents you may have already sent and notes from previous calls. But your paperwork is never put into electronic form and may not be available to the second call-taker. Olson reports the case notes are often idiosyncratic and incomplete. And because tax law is so complicated and often so ambiguous, the second staffer may interpret your dispute, and your response to it, entirely differently than the first.
One result: Because of the confusion and resulting taxpayer dissatisfaction (fewer than half of those who go through a letter audit say they are satisfied with the process), many cases are appealed. That takes more time for both taxpayers and staff, requires reviews by higher-level (and higher-paid) examiners, and probably ends up costing the agency more money.
This issue is hardly new. This is not the first time Olson has urged reform. Worse, back in 1998, senators Pete Domenici (R-NM) and Mike Enzi (R-WY), raised concerns about the program. Congress even passed a law requiring the agency “to the extent practicable” to assign a single staffer to each of these cases. Domenici retired six years ago. The agency has still not fixed the problem.
It should. Assigning one examiner to see a case to conclusion is only common sense. This is a small but classic case of a reform that would improve the agency’s standing with taxpayers and save money.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.