How the taxpayer advocate puts together that giant report every year

Maybe it’s because nearly everyone pays taxes, but few annual reports get more attention than that of the taxpayer advocate’s annual report to Congress. Especially this year, as the IRS does two things: Emerges fully from the pandemic and anticipates a big funding boost, thanks to recent legislation. To get the story behind the report, the Federal Drive with Tom Temin spoke with Erin Collins, the National Taxpayer Advocate.

Interview transcript:

Tom Temin
This report is enormous. I want to congratulate you for organizing the online version in such an easily searchable way, relative to the big long pdf of years ago. But just give us a sense of is this a year round effort to prepare this and you’ve kind of hit a button and then the report is there? I imagine this is something that you just don’t start three weeks before you get to the testimony stage.

Erin Collins
Yeah, I wish we could just push a button; the challenge is that we really start looking at issues about March, April, May timeframe, in order to start focusing on the issues. It is almost a year long process. The first thing that the statute requires is that the [National Taxpayer Advocate], or my office, identify the 10 most serious problems. And then we work with the IRS throughout the year and developing the facts, and then coming up with recommendations to try and resolve issues on behalf of taxpayers. And then during that same process, we also look at issues that have come up where we need legislation and changes. And so again, throughout the year, we go through proposals, and then come up with sort of the the final version. This year, we have I believe it’s 65 legislative recommendations that we propose to Congress to go ahead and try and correct some of the things to improve tax administration.

Tom Temin
And do you get pretty good cooperation from the IRS itself? I mean, the data for example, on telephone response, that’s their data, correct?

Erin Collins
Yeah, all the data in the book is from the IRS. So we have a procedure in essence that we issue the request, they respond. And then also, when we have the report drafted, we do a fact check, where we ask the IRS to make sure that the facts that we included in the report are accurate, because the last thing we want to do is have assumptions based on incorrect facts.

Tom Temin
Right. And in talking to Congress and really to the public about this report, you call customer experience the elephant in the room. That’s the biggest issue with IRS. And that’s a manifestation of a lot of problems behind the scenes. Is that a fair way to put it?

Erin Collins
Yeah, I would say that’s a great way of putting it. And I think the challenge, when COVID-19 hit, the pandemic really focused in on the challenges on customer service. I think previously, there were challenges with the IRS. But during COVID, it really highlighted the difficulties with telephone, the paper correspondence, everything seemed to hit at the same time.

Tom Temin
Now the paper, the issue was that the paper goes to IRS offices, and there was nobody in there to process the paper, and that they have largely gotten past.

Erin Collins
Yeah, so there’s two types of things when you think about paper. Associated with the filing season, so those go to the campuses. And that’s probably the largest volume of paper that goes into the IRS. And then there could be let’s say, an IRS examination or something that would be paper that will go into the local offices. But you are correct. Currently, the paper should be or the mail should be processed on a regular basis, both on the local offices as well as the campuses.

Tom Temin
And with respect to the telephone calls. Was the low response rate in the long wait times a result of volume? Or was it a result of what, did volume go up because of the pandemic?

Erin Collins
Yeah, that’s the biggest challenge. I think typically, if you were to look historically at numbers, IRS would receive between 80 and 100 million calls per year. So during the first year of the pandemic, it went up to about 282 million. So almost in essence three times the volume, and IRS didn’t have three times the employee resources. Last year, it dropped down to a mere 172 million, which is still almost twice as much as a normal year. So what the IRS has done recently is hired additional customer service representatives. Those are the ones who answer the phone. They were about 15,000 employees before and they’ve added an additional 5,000, in an effort to get the phones under control in the 2023 year. It’s a difficult task, because those folks that answer the phone are also the ones that process a lot of the paper that comes into the campuses.

Tom Temin
Got it. We’re speaking with Erin Collins, she is the National Taxpayer Advocate for the IRS working on behalf of the Treasury Department. And so it sounds like then the big issue is that telephone operations simply don’t scale. It’s a linear number of people you have to add for the numbers of calls that you get.

Erin Collins
Yeah, that’s correct. I mean, again, it has to do with volume. So if the IRS can put the paper behind them, get those refunds out the door, and all the other challenges, it should decrease the volume. And if you decrease the volume, they should have enough folks answering the telephones.

Tom Temin
And Congress did appropriate, I’m assuming happens every year for the next 10 years, another $8 or $9 billion per year for 10 years for the IRS. One thing that’s come to light is that they need to do a plan for how they’ll spend that money. Are you able to assess the planning so that they can use the money, if they get it? It’s never a certainty for 10 year funding plans. But presuming they get it, do they have a way of spending it for the most effect?

Erin Collins
Yeah, so the part that [Taxpayer Advocate Service (TAS)], my office, focuses on is really the service and the modernization piece, and that had specific funds allocated with the Inflation Reduction Act. And that is where we’ve been pretty involved throughout this process. So it passed over the summer, IRS immediately stood up a team, and they have been working on this. And the goal is to provide a plan to the secretary of Treasury by middle of February. And so we’ve been giving a lot of comments and have been involved in a lot of meetings on the service and modernization front. So I’ve been very optimistic about what they are envisioning. I don’t know where they’ll go in the final report. But they truly are trying to step back and look at things differently. Not just tweak what we currently have, but to be transformational is to, in essence, hopefully in three to five years, the IRS will look completely different than it did last year.

Tom Temin
Right. And IT is one of the top 10 challenges and one that got a lot of money. And they have been on a continuous modernization program for IT for at least 30 years. I mean, in some sense forever, they’ve been on the forefront of changing information technology. Maybe just sketch the outlook for modernization from an IT standpoint. Where does it stand now? And what do they need to do next?

Erin Collins
I think some of the biggest challenges IRS currently has, is they have what we call standalone systems. They’re in excess of 60 standalone systems. So when you think about computers, the real key issue they have to do is integrate all of these systems into one so that it’s seamless. So for example, if you were to call the taxpayer, the customer service representative and ask a question, they may have to look at four or five separate systems in order to assist the taxpayer in answering a question. Where if they have an integrated case management system, it should be, as earlier talked about, a push of the button, you should be able to see everything in one place. And what I’m really pushing, and I don’t think the IRS disagrees with this, is I would like the same system for taxpayers. So if you’re a business or an individual or even a practitioner, you could go online, and access your account and be able to see everything in one place. So currently, the IRS, you could go on to an account, you can see your transcript, your payments, bills, that sort of thing. It’s very basic, your W-2, 1099. What we all envision is that pretty much all of your tax information, including your tax returns, will be available. All the notices that the IRS sends to you will be in one place online, you can respond online, you can actually chat with a customer service representative through your online account. So we’re really trying to get much more similar to industry. Think of your financial institution; most people work with their financial institution through online accounts. A lot of folks, when was the last time you went into a bank? A lot of individuals are actually doing that through their online account. And that’s where I’m envisioning the IRS online account to go as well.

Tom Temin
Is the master file system somehow at the heart of all of this difficulty in getting to that state?

Erin Collins
Yeah, I mean, that’s sort of the foundation, I would say, of their computer system. So think about 170 to 260 million returns are filed each year. And that’s contained in either the individual master file or the business master file. And so they have data going back to the dawn of time. That is a major lift to modernize that system, so that can integrate with all the other systems that the IRS is looking to build.

Tom Temin
Because they have had repeated attempts at modernizing that over the years, and they keep restarting, getting fresh billions. But yet, it persists, to use the words of a famous senator.

Erin Collins
Yep. Well, I think the thing that I’m optimistic about here is, as of today, there’s ten year guaranteed funding for them. And so the challenge with IT, is how do you start an IT project on a one year budget without knowing what your budget will be year to year? So I know the commissioner and others in our office have pushed for sustained multiyear funding. With this additional funding, IT will be able to plan out one to 10 years down to make all those improvements without starting and stopping.

Tom Temin
And let me ask you about the 65 legislative suggestions to Congress on some of the IRS’ ongoing problems. In the report, they’re listed in no particular order. In your mind, are there things that you wish Congress would look at first?

Erin Collins
Yeah, I guess I have, I have a big mind, I have a lot of things I wish they would look at first. But I think if you look at things impacting a lot of taxpayers, the first one is really trying to establish the minimum competency standard for tax return preparers. That has been an issue that’s bounced back and forth for the last decade. We go into a lot of discussions in the report on this, but you look at those folks who are not regulated. What we’re seeing is a real trend towards errors in those returns. And if we looked at the [Earned Income Tax Credit (EITC)] audits, and if you look at the percentage of penalties and adjustments, a very high percentage, I think it’s about 70% of those who are unregulated. And so we really think that by getting better education, and getting these folks in the system, that’s going to produce better results for taxpayers, because a lot of people don’t realize that if your accountant makes a mistake, you’re still liable for the tax. That’s not the accountants’ fault. So that I think has been annoying to people when they realize that oops, my return preparer made the mistake, and now I’m liable for the tax and the interest and potentially penalties.

Tom Temin
Almost the way that we demand regular education and steep, difficult tests for CPAs in other words.

Erin Collins
Yes, correct.

Tom Temin
And that idea, though, does get to the complexity of the tax code. And to ask Congress to simplify that, it’s just not even, I mean, you can state it, but that’s like asking God make the earth start revolving in a different direction. It’s just simply not going to happen.

Erin Collins
Tom, let me back up on that. Because I do think one code section at a time. I think Congress can, on a go-forward basis, adjust certain code sections to make it more simple. The EITC is one, it’s very difficult for taxpayers to understand. And it’s very difficult for the IRS to audit and administer. So even making that one small correction could make a huge difference to individuals.

Tom Temin
Because in some ways this relates to another part of the report, which is what are the top most litigated areas? And the things that seem to occupy the tax courts the most are the levels of income that people are claiming, the most basic thing in the tax return. And also the Schedule A deductions. And those affect so many people, almost everyone, it seems like, that’s where they should start simplifying, just based on the litigation, or am I making connection that’s maybe not there?

Erin Collins
Well, I think if you look at the most litigated issues section, especially on the individuals, actually individuals and businesses. A lot of them are facts and circumstances. They’re not per se, a legal determination. And so it’s really whether or not the taxpayers have established sort of the burden of proving their entitlement. And if it’s gross income, the IRS is saying it should have been included, and taxpayers are saying it should be excluded. So a lot of that is really just facts and circumstances. So I think even when you look at the most litigated issue, I think people are surprised that they’re not really legal issues that are coming forward, but factual issues.

Tom Temin
All right, so getting back to the 65 legislative recommendations. The first one would be tax preparer competency. Are elements of the tax code to fix first, are those part of that 65 also?

Erin Collins
Yeah, so it’s pretty much a range of things. One of the other things when we talk about litigation. Currently, if you have what we call a refund litigation, normally, you have to go to district court or claims court. And that is a not as user friendly, if that’s the right word, for taxpayers. And when you look at the most litigated issue section in the report, you realize that a very high percentage, I think it’s in excess of 70% of these taxpayers, represent themselves in court. District court and claims court is a little more difficult for taxpayers to represent themselves. So one of the recommendations we’re making is to have those refund cases, those refund suits to be eligible to go to tax court. Those are judges who are trained in tax area, and they have procedures for individuals with under $50,000. It’s a much more informal procedure. And again, more taxpayer friendly and easy for taxpayers to use. So we’ve made that recommendation as well.

Tom Temin
We’re speaking with Erin Collins, she’s the national taxpayer advocate. And these recommendations, the ones I looked at briefly, and the ones you’ve talked about seem to be as if they would be fairly non partisan issues. I mean, the IRS comes up in partisan debates often, but these seem pretty easy fixes for Republicans and Democrats to talk about.

Erin Collins
Yeah, that’s my conclusion as well. I think they’re more procedural fixes and they should not be party line issues. These are things to improve tax administration and make it easier for taxpayers. And I think both sides of the house should be pushing for that change.

Tom Temin
And in working with the IRS throughout the year to gather the information for your report, what is your sense of what bothers them the most, the people you deal with, the managers running all these millions of subprograms that make up a pretty complex agency?

Erin Collins
I think they share a lot of what we have in the report, and it’s how do we improve our taxpayer service? How do we help our agents? And even inside the building, the IRS has had challenges: getting upgraded computers and having access and even when I worked at the campus not too long ago, simple things like making sure people have staplers and staple removers and having adequate paper. You would think that these would just be a normal situation, but there are times we just need to improve their work environment as well. So they can work better for taxpayers.

Tom Temin
I imagine those that are in the telephone operator centers, I mean, it’s easy to dump on them. It takes them two days to answer the phone, they get it wrong so much, we know what the statistics are in your report. But I imagine for those individual operators, it can’t be much fun either knowing you’ve got 300 people in your queue that you’re never going to be able to get to today.

Erin Collins
Yeah, it’s an incredibly difficult job that they have, there’s a lot of expectation. And unfortunately, a lot of the folks, by the time they reach a human, they may not be such happy people. So they do sometimes get the brunt of it. So anyone who’s calling the IRS, remember they’re the messenger, so to speak, don’t take it out on them, that we have problems in our system. They’re really there to help taxpayers, but it is an incredibly difficult job for them.

Tom Temin
And what’s your sense of the whole question of the return to the office that every federal agency is facing with some kind of normalcy? In that sense, do you think just help the agency regain some equilibrium?

Erin Collins
Yeah, I think at this point, most of the offices have gone back to what we call prepandemic routines. A lot of our employees were on what they call frequent telework. So they have the option of coming into the office a couple days a pay period. So we are back on that. The folks that are in the campus working the paper, they have physically been in the building since the summer of 2020. So they came back into the building. Revenue agents, revenue officers, other type of folks, they have more flexibility, but they also go out to taxpayer sites more often than they actually come into the building.

Tom Temin
Sure. And that gets back to the issue of human capital, one of the other top 10 problems as they add people on the phones, as they add IT people, as they add whatever they’re going to add, with the appropriated and extra funding that’s coming over the next few years, their ability to hire well to bring on people to retain people. That’s got to be one of the top challenges also.

Erin Collins
Yeah, the human capital office is facing a lot of challenges, because we’re hoping to hire a lot more people. Unfortunately, the IRS has a high attrition expectation over the next couple of years, as many as I think 50-60% of our workforce over the next four or five years. And on top of that with the additional funds from Congress, they will be hiring more individuals as well. So anyone who’s in the federal government knows it’s not easy to go through the hiring process. It’s time consuming to get people from announcing the positions all the way through interviews, and to the onboarding and the training. So it is a long process, that we need to shorten that process and get more people to the door. So they’re gonna have quite a challenge over the next couple of years.

Tom Temin
Sure. So this is then for the next incoming commissioner, there is a nominee. There’s no hearings yet on Danny Werfel yet. But he’s been at the agency before, as you know, this is a little bit out of your lane, maybe. But if you were the incoming commissioner, what would be the first three things you would do?

Erin Collins
Well, I think he’s coming in at an interesting time, because the report to the secretary of Treasury was sort of I call it the opening offer of what they plan on doing over the next 10 years. I do expect as time goes by that plan will be updated and changed. But he’ll be coming in right about when that plan has been completed or submitted to the secretary. So he’s kind of walking into it a little bit after the fact. So he’s going to have to catch up with that. But I would think hiring and retention and training is going to be key, as well as modernization. I would think those are the three things he’s going to be focusing on.

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