News Analysis
Reaching Out to Taxpayers
Tax Notes
May 12, 2008
by Joann M. Weiner
Ten years ago, under the direction of the new IRS Commissioner Charles O. Rossotti, the IRS adopted a new mission statement: to ''provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.''
The mission statement adorns the walls of the IRS headquarters on Constitution Avenue in Washington and is printed in IRS publications and forms. IRS employees typically respond ''at the Service'' when asked where they work.
As IRS Commissioner Douglas Shulman takes the helm, it is time to evaluate whether the IRS has accomplished its mission.
In many ways, it has. The IRS has processed 140 million individual taxpayer returns so far during the 2008 filing season, and it accomplished that task despite last-minute changes to the tax code that required the IRS to reprogram its systems to accommodate the new law providing relief from the alternative minimum tax.
Compounding the strains on the IRS, Congress passed an economic stimulus package in February that required the IRS to distribute $168 billion worth of economic rebate checks as soon as the filing season came to an end. The IRS mailed out more than 130 million postcards to remind individuals of the need to file returns this year to receive a stimulus payment. The IRS also held events, such as the ''Super Stimulus Saturday'' on March 29 in Washington, to provide filing assistance to help those who might not otherwise be required to file because their income is either too low or not taxable. The IRS sent out the first payments — almost 8 million of them totaling $7.091 billion — the first week of May.
Taxpayer satisfaction with the IRS is now significantly higher than it was in the summer of 1997. As Rossotti reports in Many Unhappy Returns, his memoir from his time as commissioner, ''The IRS had the largest number of customers and the lowest approval rating of any institution in America.''
Yet in many ways, the IRS has failed to meet its mission of providing top-quality service.
This shortfall occurs in many areas, such as electronic filing, but it is most apparent in the services provided to low-income, limited-English proficiency taxpayers. The Free File service is one example of the former problem.
Free File Not Free for All
More than 80 million individuals filed their tax returns electronically this year, an increase of more than 10 percent over 2006. Electronic filing saves the IRS an estimated $2.36 for each return that would otherwise be filed on paper.
Because taxpayers whose income exceeds a threshold must pay a fee to e-file, many continue to prepare their tax returns on a computer and then print them out and mail them to the IRS. In 2006 some 38 million individuals chose this option, which saved each taxpayer $14.95 (less postage fees), but cost the IRS an additional $2.36 per return. National Taxpayer Advocate Nina Olson noted in her testimony before the Senate Finance Committee in April 2006 that she prepared her tax return electronically, but added, ''[I] resented the notion that I would have to pay separate fees to prepare my return and to file it, so I printed out my return and mailed it in.''
In its report on the 2007 filing season, the Government Accountability Office noted that the IRS could save $90 million a year if it simply converted these computer-generated but paper-filed returns to e-filed returns. Moreover, because of the additional costs incurred in transcribing and posting the information, the IRS does not transfer all of the information on the tax return to its electronic database. The GAO report notes that the IRS believes it could increase revenue by $175 million a year if all of this information were available electronically, by shifting to the audit division human screeners who currently review information that is not posted electronically. (For the report, see Doc 2007-27583 or 2007 TNT 243-18.)
Even those who are eligible for free e-filing rarely file their returns electronically.
More than 97 million taxpayers have adjusted gross income of $54,000 or less and may use Free
File to e-file their returns at no charge through 1 of the 19 tax preparation companies that offer free online tax preparation and filing services.
Yet, as Shulman noted in his testimony on the IRS budget before the House Appropriations Committee on April 15, just 3.6 million people had used this free service as of April 5. (For the testimony, see Doc 2008-8384 or 2008 TNT 74-64.)
A participation rate of 2.7 percent suggests that the program may not be reaching its intended audience.
The IRS has not indicated the reasons for the low participation rate. But Olson suggests that the answer may have something to do with technology. As noted in the her 2006 Annual Report to Congress and based on opinion surveys of taxpayer resources conducted by the IRS Wage and Investment Research Division, nearly one out of every four taxpayers lacks access to the Internet.
Many taxpayers do not use the electronic services the IRS offers because they do not have ready access to a computer. Thus, although the IRS promotes its e-filing and provides a great deal of information online, many low-income taxpayers face an electronic barrier to using the Free File service and remain unaware of it.
Español o Inglés?
The barriers to taxpayer service are not only electronic, they are also linguistic.
The IRS provides a significant amount of information in Spanish, but it fails to provide some critical information in a language other than English. An egregious example of the IRS's failure to communicate to the Spanish-speaking community appears in the link to one of the most important IRS tax publications, Your Federal Income Tax (Publication 17), which indicates it is English only: Publicación 17 (inglés solamente) Entendiendo su Impuesto Federal sobre el Inglés. (See http:// www.irs.gov/pub/irs-pdf/p17.pdf.)
Publication 17 is one of the most helpful taxpayer documents, as it covers the general rules for filing a federal income tax return and, as noted in the introduction, ''explains the tax law to make sure you pay only the tax you owe and no more.'' The electronic version also provides more than 800 internal links to help taxpayers navigate to whatever page of the nearly 300-page document that provides the sought-after information. It also provides external links to more than 50 documents available on the IRS Web site and explains how to find free help in preparing the return through the
Volunteer Income Tax Assistance and Tax Counseling for the Elderly (VITA/TCE) programs.
Spanish-speaking taxpayers who try to find more information on free e-filing will encounter a significant barrier. The IRS's Spanish-language Web site for the Free File service says: ''Free File está disponible en inglés, y es tan simple que usted mismo puede utilizarlo.'' (See http://www.irs.gov/efile/article/0,,id=118986,00.html.)
Free File is simple to use, of course, if you speak English. Because more than half of all taxpayers, regardless of their language capabilities, indicate that they have difficulty understanding the tax forms, this barrier to taxpayer compliance seems particularly high for limited-English-proficiency taxpayers. Nearly three-fourths of those taxpayers are Spanish speakers. (The IRS is aware of the problem, as Olson cited language and cultural barriers to tax compliance for those taxpayers as one of the most serious problems in her 2006 annual report.)
Therefore, it might not be too surprising that although 97 million taxpayers are eligible for Free File, fewer than 4 million taxpayers use it.
Advocate Tries to Help
The national taxpayer advocate — the ''voice for taxpayers and taxpayer rights'' — recognizes the particular difficulties that low-income taxpayers face when preparing their tax returns and that they would greatly benefit from taxpayer assistance. For example, in 2006 Olson reported results from the IRS Oversight Board's Service Channels Survey showing that taxpayers ''overwhelmingly'' prefer to obtain their assistance from a person rather than through automated phone responses or over the Internet.
The IRS provides a significant amount of information in Spanish, but it fails to provide some critical information in a language other than English.
These views appear in statistics reflecting use of electronically provided services. Although roughly 30 percent of all taxpayers said they had used the IRS Web site in the two years covered by the opinion survey, just 10 percent to 20 percent of taxpayers making less than $35,000 had used it during that period. Because these low income taxpayers make up 30 percent of all taxpayers, this figure indicates that a large percentage of taxpayers do not access the information electronically.
Improving taxpayer service does not appear to lie in increasing the availability of Web-based solutions. The answer lies in increasing the availability of people-based solutions.
However, the IRS may not be in the best position to meet the growing need for in-person taxpayer assistance.
Congress received an ominous forecast about the IRS's ability to provide effective taxpayer assistance at an April 15 hearing of the Senate Appropriations Subcommittee on Financial Services and General Government. J. Russell George, the Treasury Inspector General for Tax Administration, reported that the IRS expects that 30 percent of its current employees will be eligible for retirement in less than two years. (For the report, see Doc 2008-8547 or 2008 TNT 75-51.) George expressed particular concern about the IRS's ability to ''adequately administer the tax code'' and said it may have fewer ''qualified employees'' on the front line to assist taxpayers.
VITA
Fortunately, the IRS is not the only place where taxpayers can find help filing their tax returns. Low-income taxpayers may find free help through the nearly 12,000 VITA/TCE sites. Last year more than 76,000 volunteers prepared more than 2.63 million returns, an increase of 25 percent over the previous year.
In testimony to the Senate Appropriations Committee on April 16, Paul Cherecwich, chair of the IRS Oversight Board, recognized the value of the VITA program and even recommended expanding it. Cherecwich noted, ''The IRS must seize opportunities to provide innovative outreach, education and community partnerships. For example, given limited resources and elimination of programs such as TeleFile, the IRS must also work to broaden and strengthen partnerships, such as'' VITA. (For his testimony, see Doc 2008-8563 or 2008 TNT 75-52.)
The IRS Oversight Board acknowledges that the IRS cannot increase its efforts to expand the VITA program without additional funding. Thus, the board recommends allocating $10 million of the IRS budget toward expanding VITA and low-income tax clinics.
The IRS implemented the VITA program in 1969 as part of the Tax Reform Act. Programs under the
VITA umbrella include Tax Counseling for the Elderly, Military VITA, and Community VITA. In 2007 these VITA operations served more than 2.5 million taxpayers, with the Community VITA sites accounting for nearly 1 million of those taxpayers. Return preparation services provided at volunteer sites have increased significantly, while services provided at the IRS's walk-in sites have fallen sharply over the same period.
Although the IRS has operated VITA programs for nearly 30 years, until recently the IRS provided only in-kind support to the Community VITA programs through tax software, tax forms, and in some cases, computers and printers. All other funding for volunteer assistance programs went toward sites used by the military or the elderly. In December 2007 Congress provided the IRS with $8 million to establish a one-year matching grant program for Community VITA sites.
The Taxpayer Assistance and Simplification Act (H.R. 5719) — which has passed the House and is now before the Senate Finance Committee—would make an important modification to the funding of low-income taxpayer services. As part of the increased funding for qualified low-income taxpayer clinics from $6 million to $10 million per year, the bill would authorize funding for Community VITA programs for the first time.
Money for community VITA sites should help provide the needed volunteers who can help low income taxpayers prepare their tax returns and, in so doing, save the expenses that would otherwise go toward commercial tax preparers. According to calculations conducted by the antihunger group, Bread for the World, low-income taxpayers pay up to $300 each, or $650 million total, on services provided by commercial tax preparers.
In a press release issued when the House passed the assistance act, Todd Post, a senior editor at Bread for the World and author of ''Asset Building at Tax Time: Scaling Up Volunteer Income Tax Assistance,'' said paying for return prep is an unnecessary expense for the working poor and other low-income Americans. ''VITA sites are certified by the Internal Revenue Service and offer comparable services, including rapid refunds, for free,'' he said. ''Another important thing VITA sites do is provide financial education, something people can't expect from a commercial tax preparer, certainly not for free.''
Saving Money
The VITA program is a cost-effective way to help people file their federal and state tax returns. As shown in a recent study by the GAO, the cost of volunteer tax services provided through organizations such as the D.C. EITC Campaign is a fraction of what it costs to provide taxpayer services through other means. For example, the GAO report shows that the estimated cost per contact in fiscal 2005 for the IRS to answer tax law questions ranged from $19.46 when the IRS provided assistance via toll free telephone, to $52.51 when the IRS answered questions via e-mail. (For the report, see Doc 2008-8648 or 2008 TNT 76-24.)
By contrast, providing assistance through VITA sites cost just $12.01 per contact.
The VITA program is a cost-effective way to help people file their federal and state tax returns.
The only cheaper way to provide assistance is through nonhuman contacts, such as automated telephone responses or downloads from the IRS Web site.
Despite the widespread support for the cost effective volunteer taxpayer services, the administration has proposed sharply reducing taxpayer service programs. It has proposed reducing funding for the IRS-sponsored taxpayer assistance centers by $31 million, taxpayer advocate services by $8 million, and the VITA program services by $8 million.
On April 14 the Bush administration announced in a statement that it strongly opposes the Taxpayer Assistance and Simplification Act because of provisions affecting health savings accounts and the proposed elimination of private debt collection. The statement indicated that if the act contained those provisions, senior advisers would recommend the president veto the bill.
As a result, the IRS may not yet be able to accomplish its mission to provide taxpayers top-quality service in meeting their tax responsibilities.
