Taxpayer Advocate Service34
Most Serious Problem #XMost Serious Problem #3: IRS Transparency
PROBLEM TITLE
Problem Title Subheader
IRS TRANSPARENCY
The IRS Still Does Not Provide Sufficient Clear and Timely Information to the Public,
Causing Confusion and Frustration and Complicating Agency Oversight
WHY THIS IS A SERIOUS PROBLEM FOR TAXPAYERS
Although the IRS made great strides during the 2023 ling season, some taxpayers and tax
professionals still struggle to access information from the IRS. ey have diculty nding clear
and timely guidance on which they can rely, determining the status of pending issues,
understanding IRS correspondence and whether they must respond to it, and reaching an IRS
employee with the knowledge to answer their questions and the authority to resolve their
problems. ese issues stem from the lack of eective two-way communication between the IRS
and the taxpayers who have to interact with it, creating the potential for confusion, mistrust, and
frustration with the tax system.
To properly set and manage expectations, taxpayers and tax professionals need clear and detailed
information. While the IRS has communicated certain service improvements and objectives to
the public, agency messaging on some issues has portrayed IRS modernization in ways that omit
relevant context or sucient detail, causing confusion and false expectations. As a result, there is
a risk that overly optimistic messaging may erode trust over time if the taxpayer experience diers
from what the IRS claims to have accomplished. Also, without more specic and measurable
data on the use of funds and future IRS plans, Congress and stakeholders will not have enough
information to provide informed oversight and help guide the IRS in its decision-making.
EXPLANATION OF THE PROBLEM
e IRS’s Strategic Operating Plan (SOP)
1
acknowledges numerous problems impacting taxpayers and tax
professionals and lays out a high-level framework for how the agency intends to transform its operations to
address the challenges it faces. e National Taxpayer Advocate commends the IRS for recognizing problems
https://www.irs.gov/pub/irs-pdf/p3744.pdf.
Annual Report to Congress 2023 35
Most Serious Problem #3: IRS Transparency
Most Serious Problem #3: IRS Transparency
and working toward improving service and tax administration but is concerned with the lack of specicity
and broad scope of the initiatives in the published plan. As the IRS progresses with the initiatives identied
in the SOP, it presents IRS leadership the opportunity to be transparent throughout the process, share its
prioritization of initiatives, and provide updates and detailed information to the public and IRS employees to
gauge feedback.
Properly implementing Ination Reduction Act (IRA) funding does not just involve revitalizing certain
IRS services.
2
It involves establishing a framework that will allow the IRS to remain responsive to taxpayer
needs going forward and rebuilding the agency to provide quality service by improving its customers’
experience based upon the foundation of taxpayer rights. But just as important to transforming the agency,
the IRS should continue to foster closer relationships with stakeholders and create open two-way lines of
communication so that taxpayers and tax professionals can continue to provide insights on the problems that
the IRS needs to address, both now and as the IRS implements initiatives and looks to understand what has
worked and what has not. Open and clear communication with taxpayers and stakeholders is not a one-time
x for the agency; rather, it is an opportunity for continuous collaboration to ensure the agency can remain
responsive to the needs of the tax community.
Problems from inadequate transparency include:
• IRS messaging on some aspects of its reform progress omits relevant details and sets incorrect
expectations;
• e IRS has not done enough to consistently and proactively engage stakeholders to timely obtain
and consider their feedback;
• e IRS is often not proactive in issuing timely legal guidance, which requires taxpayers and
tax professionals to gure out the relevant law or procedures on their own, and it sometimes
issues guidance inconsistent with the expectations of the tax community, requiring taxpayers, tax
professionals, related businesses, and stakeholders to reverse course at the last minute;
• e IRS does not always notify taxpayers of errors or programming changes to IRS tools;
• e IRS does not provide enough transparency to taxpayers seeking information from the IRS on the
status of claims, refunds, and the resolution of issues; and
• On rare occasion, the IRS has acted inappropriately. While occasional mishaps are hard to prevent
in an agency as large as the IRS, the agency’s reluctance to quickly acknowledge a mistake may
create the perception that mishaps are commonplace, which is not reality. Candor and prompt
acknowledgement of errors build credibility. Lack of candor and delay in correcting a mistake can
erode it.
ANALYSIS
What Is Transparency, and Why Does It Matter?
“Transparency” is the government’s obligation toshare with citizens the information they need to make
informed decisions and hold ocials accountable for the conduct of the people’s business.
3
Government
accountability means thatpublic ocials have an obligation to explain their decisions and actions to citizens.
2 An Act to Provide for Reconciliation Pursuant to Title II of S. Con. Res. 14 (commonly referred to as the “Inflation Reduction Act of
3 The Freedom of Information Act reflects the belief that citizens have a right to know what their government is doing and that
the burden is on the government to prove otherwise. SeeThe New Freedom of Information Act,
. It requires that the government operate on the presumption of
disclosure and that the public may readily obtain information from the government, subject to certain exemptions. In general,
sunshine laws require transparency and disclosure in government or business by making meetings, records, votes, deliberations,
and other official actions available for public observation, participation, and/or inspection.
Taxpayer Advocate Service36
Most Serious Problem #3: IRS Transparency
At its core, transparency is about establishing trust and improving the communication of the IRS with the
tax community and with Congress. All relationships depend on honest and straightforward communication,
and one’s mandatory relationships with government institutions are no exception.
4
Full transparency is
important for:
• Accountability: e IRS needs to provide straightforward and detailed information about its decisions,
actions, and reform plans so stakeholders can give informed feedback, and Congress can take any
action needed to modify the law.
• Simplicity: Taxpayers need clear answers to their questions so they do not have to spend time
struggling to understand tax law requirements.
• Trust: Taxpayers will be increasingly willing to engage with the IRS when they know IRS employees
can provide them with prompt and knowledgeable answers, help nd fair and eective resolutions to
issues, and help them be compliant with the tax laws.
Accountability: Specific, Clear Information From the IRS Allows for Better Stakeholder
Feedback and Improved IRS Decision-Making
In Promoting Its Efforts Toward Reform, the IRS Has Sought to Sell Its Successes in Ways That Do
Not Provide Sufficient Detail About Its Progress
Some IRS communications in 2023 portray IRS modernization in ways that omit relevant context or
sucient detail and that some may perceive as an overly optimistic version of actual progress, sometimes
leading to unrealistic expectations. While this type of messaging may be reassuring in the short term,
taxpayers and tax professionals must deal with the underlying realities; the gap between messaging and actual
progress, along with unrealistic expectations, over time erode trust in tax administration. As a non-partisan
administrator of the U.S. tax system, the IRS should provide full and candid information about the state of its
operations, not just pick and choose the data that makes the agency look best. In the words of Commissioner
Werfel, the IRS “must be transparent about [its] work, be responsible stewards of the taxpayer dollars we
receive, and collaborate with Congress and other oversight entities.”
One example of the lack of detail is how the IRS touted its successes with its Paperless Processing Initiative
5
but omitted important context. e IRS has said that “taxpayers are now able to digitally submit all
correspondence and responses to notices.”
6
However, the IRS did not explain that while taxpayers and tax
professionals may submit documents digitally through the Document Upload Tool (DUT), the agency has
not yet developed an IRS-wide streamlined backend system to manage the processing of those submissions.
e IRS must still do some manual sorting and processing for documents submitted through DUT, which
has created delays and unrealistic expectations of timing.
7
Some notices do not t the criteria to allow for
a digital response, such as when the notice requires a pen/ink signature. IRS messaging silently omits those
notices from the denition of “all” for this purpose, which is confusing to taxpayers and tax professionals who
expect to be able to submit documents digitally but nd that this option is not available for some notices.
Elimination of paper is a good thing for tax administration, but it is only the rst step in the paperless process.
4 Seehttps://open.usa.gov/assets/files/NAP5-fifth-
open-government-national-action-plan.pdfReforming (and Saving) the IRS by Respecting the Public’s Right to Know,
https://virginialawreview.org/articles/reforming-and-saving-irs-respecting-publics-right-know/.
5 See, e.g.
https://www.irs.gov/newsroom/irs-achieves-key-paperless-processing-initiative-goal-outlines-
improvements-for-filing-season-2024.
Id.
7 See Most Serious Problem: Online Account Access for Taxpayers and Tax Professionals: Digital Services Remain Inadequate,
Impeding Efficient Case Resolution and Forcing Millions of Taxpayers to Call or Send Correspondence to the IRS, infra.
Annual Report to Congress 2023 37
Most Serious Problem #3: IRS Transparency
e IRS needs to properly manage the expectations of taxpayers and tax professionals while it works on
establishing a more ecient backend system for processing DUT receipts before creating the next backlog
of documents.
Similarly, the IRS announced that taxpayers may electronically submit Form 1040-X, Amended U.S.
Individual Tax Return, but it has not emphasized that the agency continues to process these forms manually,
resulting in long delays in both data intake and the issuance of refunds. As of the end of the 2023 ling
season, it took the IRS about seven months to process Forms 1040-X
8
and, as of November 11, 2023,
about 770,000 Forms 1040-X remain unprocessed.
9
While any step taken toward reduction of paper
submissions is positive, IRS messaging should not overstate what it has accomplished, and it needs to set
realistic expectations regarding timing. Taxpayers and tax professionals who submit documents electronically
likely expect faster processing times than with paper submissions and are confused and surprised to nd that
signicant delays still occur.
IRS communications have also celebrated the agency’s 85 percent Level of Service (LOS) responding to
taxpayer phone calls in 2023. at was a signicant achievement and a vast improvement over the prior year.
However, the IRS selectively chooses data for its LOS metric in several ways, and the LOS metric does not
equate to the percentage of total calls that live assistors answered. While it achieved its 85 percent LOS based
upon its metrics, it answered just 35 percent of all taxpayer calls received.
10
e LOS measure is also not the
same for all lines, with some lines having a lower LOS than others. Notably, the LOS in scal year (FY) 2023
on the Practitioner Priority Service (PPS) line, the primary phone line for taxpayers’ representatives, was only
34 percent, with an average wait time of 16 minutes.
11
Additionally, achieving the 85 percent LOS during the
2023 ling season came at a cost to millions of taxpayers. To reach 85 percent, the IRS temporarily reassigned
employees to focus on answering phones even when call volumes were low, shifting them away from their
other responsibilities, which include processing amended returns and handling taxpayer correspondence.
Having customer service representatives (CSRs) primarily working the phone caused the CSRs to be idle
34 percent of the time.
12
Being idle essentially means the CSRs were waiting for the phone to ring and not
working on other tasks. Not surprisingly, the focus on the phones once again led to a growth in the backlog
of amended returns and paper correspondence.
13
Despite this temporary increase in attention to phones, tax
professionals in focus group sessions on IRS Transparency at the 2023 IRS Nationwide Tax Forums reported
continuing dissatisfaction with IRS phone service both in terms of wait times and in receiving knowledgeable
answers from the IRS employees with whom they spoke.
14
In the National Taxpayer Advocate’s conversations
with tax professionals at the IRS Nationwide Tax Forums, many expressed confusion and displeasure with
the IRS’s representation that it was answering 85 percent of calls in under four minutes; this was not the
experience they had when calling the PPS line.
https://www.irs.gov/newsroom/irs-operations-status-of-
mission-critical-functions.
10 SeeNational Taxpayer Advocate’s
Introductory Remarks), https://www.taxpayeradvocate.irs.gov/reports/2024-objectives-report-to-congress/.
11
See also Most Serious Problem: Telephone and In-Person Service: Despite Improvements in Its Service Levels, the IRS Still Does Not
Provide Taxpayers and Tax Professionals With Adequate, Timely Telephone and In-Person Service, infra.
12
13 From December 2022 through the filing season, the inventory of amended tax returns more than doubled from 1.5 million to
3.4 million, and the inventory of taxpayer responses to IRS notices and other AM cases awaiting processing increased from
14
Taxpayer Advocate Service38
Most Serious Problem #3: IRS Transparency
e IRS has described its progress on developing a Direct File pilot that will allow taxpayers to e-le returns
directly with the IRS, suggesting that the success and expansion of Direct File is all but certain.
15
However,
according to a report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS’s public
survey on Direct File may have overestimated taxpayer interest in the possibility of such a tool and led
taxpayers to think the tool would have more options than will immediately be available, such as the ability to
le state tax returns. Additionally, the IRS could not provide TIGTA with any supporting documentation for
how the IRS estimated the tool’s costs.
16
e IRS needs to be transparent and provide detailed information
to the public on the specics of the pilot, its successes, its challenges, the associated costs, and the usage of the
pilot program.
e IRS has highlighted its improvements to in-person assistance, noting that it has opened or reopened
50 Taxpayer Assistance Centers (TACs) since the start of November 2022.
17
TAS commends this much-
needed improvement; however, the public statements do not tell the whole story. On the positive side, the
IRS exceeded the number of taxpayers assisted at TACs in the prior year, but it closed or was unable to open
43 TACs because of stang shortages at some point during the 2023 ling season, and it did not fully sta
230 TACs.
18
Falling well short of Secretary Yellen’s directive to fully sta all TACs by 2023, as of September
2023, 266 of the 363 TACs (73 percent) were less than fully staed, limiting service appointments available to
taxpayers.
19
Again, the National Taxpayer Advocate is appreciative of the IRS providing these much-needed
services but is concerned that the representations fall short on the details, misleading the public. Also, these
resources are largely unavailable to taxpayers living, working, or doing business outside of the United States.
20
High-prole statements on the status of Employee Retention Credit (ERC) claims have also not always
matched reality. For example, in September 2023, the IRS announced a moratorium on the processing of
newly led claims but indicated it would continue to process ERC claims led prior to the moratorium.
21
However, data shows that the IRS had all but stopped processing these claims by that time, and they continue
to be paused as of the writing of this Most Serious Problem.
22
Although the term “processing” generally
means taking an action such as allowing the claim in full or part, disallowing the claim in full or part, or
assigning to a revenue agent for examination, the IRS seems to be using the term “processing” to include
stepping back and strategizing how to proceed – not the actions most taxpayers think of as processing. As
a result, hundreds of thousands of pre-moratorium claims are still waiting on the IRS to process them, and
taxpayers await refunds while the number of post-moratorium claims continue to pile up.
23
15
https://www.irs.gov/newsroom/irs-achieves-key-paperless-processing-initiative-goal-outlines-improvements-for-
filing-season-2024.
Inflation Reduction Act: Assessment of a Free and Electronic Direct Filing Tax Return System
https://www.tigta.gov/reports/audit/inflation-reduction-act-assessment-free-and-electronic-direct-filing-tax-return.
17
https://www.irs.gov/newsroom/irs-achieves-key-paperless-processing-initiative-goal-outlines-improvements-for-
filing-season-2024.
See Inflation Reduction Act: Assessment of the IRS’s Efforts to Deliver Expected Improvements for
the 2023 Filing Seasonhttps://www.tigta.gov/reports/inspection-evaluation/inflation-reduction-act-assessment-irss-
efforts-deliver-expected.
https://home.
available workstations in a TAC filled with the appropriate type of face-to-face employee.
20 See Most Serious Problem: Compliance Challenges for Taxpayers Abroad: Taxpayers Abroad Continue to Be Underserved and Face
Significant Challenges in Meeting Their U.S. Tax Obligations, infra.
21
https://www.irs.gov/newsroom/
to-protect-taxpayers-from-scams-irs-orders-immediate-stop-to-new-employee-retention-credit-processing-amid-surge-of-
questionable-claims-concerns-from-tax-pros.
22 See Most Serious Problem: Processing: Ongoing Processing Delays Burden and Frustrate Taxpayers Awaiting Refunds and Other
Account Actions, supra.
23 Id.
Annual Report to Congress 2023 39
Most Serious Problem #3: IRS Transparency
e list could go on. e point is that it shouldn’t. e question going forward is how to ensure that IRS
reform eorts focus on long-term progress rather than short-term narratives. Stakeholders debated this issue
at length in the run-up to the IRS Restructuring and Reform Act of 1998 (RRA 98),
24
legislation that led to
extensive reforms at the IRS. e bipartisan commission assigned by Congress at the time to investigate IRS
reform stated in a 1997 report that unless the IRS could be “insulated from political interference,” the result
would be that the IRS would take a “reactive” approach to reform eorts, with “scattered attention to a host of
non-strategic issues.”
25
THE IRS MUST FOCUS ON LONG-TERM PROGRESS
rather than short-term narratives
To that end, the commission considered the appropriate role for the Treasury Department in tax
administration.
26
e commission found that Treasury’s increased involvement in IRS oversight “often
amount[ed] to little more than costly and sporadic exercises in micro-management that lack the necessary
strategic and long-term focus. … e Commission is condent that Treasury, the President, and [the] IRS
would save resources and improve tax administration if the Treasury spent less time ‘in the details,’ and more
time focused on priority matters and overall accountability at the IRS.”
Before Congress passed RRA 98, the working assumption initially was that the IRS would be removed from
the Treasury Department.
27
Ultimately Congress decided to leave the IRS within the Treasury Department
but to also establish an IRS Oversight Board, consisting primarily of people from the private sector with
experience running large service organizations who could provide independent guidance to “ensure that the
IRS is moving forward in a cogent, focused direction.”
28
While the IRS Oversight Board still exists by statute,
it has been eectively defunct since 2015 when it suspended operations.
29
As such, it remains unresolved how
to insulate the IRS from the sometimes short-term goals of the Treasury Department. But it is important
for tax administration that the IRS remain insulated from political interference and focus on its mission
of providing America’s taxpayers with top-quality service by helping them understand and meet their tax
responsibilities and by enforcing the law with integrity and fairness.
24
25 See
https://www.taxnotes.com/tax-notes-today-federal/legislative-and-policy-issues/full-text-irs-restructuring-commissions-final-
.
Id. (“While Treasury retains its rightful place as the developer of tax policy for the executive branch, it generally is, and should
remain, removed from tax administration.”).
27 George Guttman, The IRS Oversight Board: One Year in, TAX NOTES, Dec. 10, 2001, at 1375, https://www.taxnotes.com/
tax-notes-today-federal/tax-system-administration-issues/news-analysis-irs-oversight-board-one-year/2001/12/12/10cp5.
Report of the National Commission on Restructuring the Internal Revenue Service, A Vision for a New
https://www.taxnotes.com/tax-notes-today-federal/legislative-and-policy-issues/
.
See Armando Gomez, Can the IRS Yet Achieve the Restructuring Commission’s Vision?, 20 PITT. TAX REV
https://taxreview.law.pitt.edu/ojs/taxreview/article/view/. Some other statutory changes remain effective, however. For
Taxpayer Advocate Service40
Most Serious Problem #3: IRS Transparency
The IRS Needs to Take a More Centralized and Permanent Approach to Engaging External
Stakeholders and Seeking Comments From Stakeholders
e IRS has emphasized that feedback from external stakeholders is an important part of implementing
the initiatives in its reform plan.
30
To maximize the value of potential feedback, the IRS should provide
stakeholders with specic and detailed information on its plans, provide a centralized location on IRS.gov for
opportunities to comment, and eectively manage the comments it receives.
Publicizing requests for feedback in dierent ways can make it dicult for stakeholders to keep track of all
the issues on which the IRS is seeking comments, as well as the specic email addresses where they should
send comments. For example, to publicize the request for comments on SOP Initiative 2.3, the IRS created
an email address where stakeholders could submit comments ([email protected]v), which it noted in certain
email newsletters and sent to various IRS advisory committees and groups advancing taxpayer interests.
31
For Initiative 2.4, the IRS created a separate email address (LBI.SOP.I[email protected]v) that it
announced in a news release.
32
Stakeholders who did not see a particular email or presentation with the
information may have missed the opportunity to comment.
e IRS should list all comment opportunities on IRS.gov and consider designing pages so stakeholders can
submit comments directly on the website, similar to the existing online page that allows for stakeholders
to submit comments about IRS forms and publications.
33
An added benet of a centralized approach to
comments is that it would create a more permanent, ongoing approach to stakeholder feedback. Reform
should be an ongoing process of incremental improvement that public feedback continuously informs.
In seeking feedback on some SOP initiatives, the IRS has sought to leverage some of its existing relationships
with stakeholder groups, such as the Electronic Tax Administration Advisory Committee, the Internal
Revenue Service Advisory Council, and the Taxpayer Advocacy Panel. ese groups provide valuable feedback
to the IRS on many issues. Having these groups available for comment further underscores the importance of
establishing long-term institutional approaches to feedback.
Simplicity: Taxpayers Shouldn’t Have to Struggle to Figure Out How to Comply and
Claim Benefits
Confusing or Late Legal Guidance Causes Problems for Taxpayers, Tax Professionals, Related
Businesses, and Stakeholders, Potentially Requiring Them to Reverse Course at the Last Minute
When IRS guidance isn’t timely or doesn’t settle issues with certainty, the agency eectively passes the burden
of interpreting tax law to taxpayers and tax professionals while retaining for itself the option of later choosing
a position. Taxpayers should not have to get an advanced degree in tax law to understand their obligations.
ey need straightforward, plain language information on what the law requires so they can meet their
obligations eectively and foresee how the law will impact their transactions.
30 See, e.g.https://www.irs.gov/pub/
irs-pdf/p3744.pdf.
31
32
https://www.irs.gov/newsroom/irs-requests-comments-on-expanding-tax-certainty-and-issue-
resolution-programs-for-business-taxpayers.
33 https://www.irs.gov/forms-pubs/comment-on-tax-forms-and-
publications.
Annual Report to Congress 2023 41
Most Serious Problem #3: IRS Transparency
STRAIGHTFORWARD, PLAIN LANGUAGE IS NECESSARY
Taxpayers should not have to get an advanced degree in tax law
to understand their obligations
For example, in the lead-up to the 2023 ling season, the IRS was slow to clarify its position on two
signicant issues of widespread concern, leading to uncertainty and confusion for taxpayers, tax professionals,
and related businesses.
34
e rst involved the taxability for federal income tax purposes of special state
relief payments or tax refunds paid in 2022 to residents of 21 states to help oset the costs of ination or
the pandemic. Despite considerable high-prole uncertainty on the federal tax treatment of such payments
and requests by numerous states for guidance, the IRS did not clarify its position until February 10, 2023,
after the ling season had begun.
35
Because ling had already started, tax return software developers had
already devoted resources to deciding how to treat the amounts and programmed their software accordingly
(knowing the risk that the IRS might later take a dierent view but having little or no option). Any taxpayers
who led returns reporting the payments as taxable would have needed to le amended or superseding
returns to exclude the payments. e IRS could have avoided such cost and confusion with more timely and
proactive guidance.
Another example of late guidance involved the changes to reporting thresholds for the issuance of Forms
1099-K, Payment Card and ird Party Network Transactions, by third-party settlement organizations such
as Venmo, PayPal, and Cash App. e expansion of the reporting requirements from prior law had led
to widespread concern that many taxpayers would receive incorrect Forms 1099-K and not know how to
account for them when ling their tax return. ird-party settlement organizations and users of the apps
repeatedly asked the IRS to provide guidance. Despite nearly two years of lead time, on December 23, 2022,
the IRS eectively pulled the plug, postponing implementation of the lowered reporting threshold for one
year.
36
en, at the end of 2023, the IRS issued another one-year postponement, announcing on November
21, 2023, that it will again delay the $600 Form 1099-K reporting threshold for third-party settlement
organizations due to the “complexity of the new provision, the large number of individual taxpayers
aected, and the need for stakeholders to have certainty with enough lead time.”
37
Although delaying the
implementation of the new legislation is favorable to taxpayers and should reduce taxpayer confusion and
frustration during 2024, early and clear guidance could have reduced the anticipated burdens. Once again,
the National Taxpayer Advocate recommends the IRS continue to provide guidance and education to reduce
burdens as it implements the transition starting in 2025 and provide specic guidance to taxpayers who
receive an incorrect Form 1099-K for personal use.
e continuing saga of ERC claims should also serve as lessons learned to the IRS on how it should have
developed early guidance and processes when implementing new legislation. e ERC is a refundable credit
that Congress rst authorized in 2020 during the COVID-19 pandemic to provide employers with additional
34 SeeATIONAL
TAXPAYER ADVOCATELOGhttps://www.taxpayeradvocate.irs.gov/news/nta-blog-the-irs-must-be-proactive-in-
issuing-timely-and-clear-guidance/.
35 https://www.irs.gov/
newsroom/irs-issues-guidance-on-state-tax-payments-to-help-taxpayers.
https://www.irs.
.
37
https://www.irs.gov/newsroom/
5000-for-2024-to-phase-in-implementation
.
Taxpayer Advocate Service42
Most Serious Problem #3: IRS Transparency
funds to help them retain employees. However, a cascade of issues, many but not all within the IRS’s control,
led to extensive delays in processing ERC claims
38
and ultimately to potentially fraudulent claims.
39
While the
IRS issued guidance relatively quickly after Congress rst enacted ERC legislation,
40
the guidance and rules
for eligibility confused many small business owners.
41
Taxpayers and tax professionals were largely unable
to reach knowledgeable IRS representatives who could clarify how the rules would apply in their situation.
42
e processes the IRS developed for ERC claims relied on manual processing of paper submissions at a time
when few employees were available to work those claims.
43
A TIGTA audit found that the IRS did not timely
update its programming and procedural guidance, adequately train employees on processes, or appropriately
prioritize ERC claims.
44
e combination of confusing rules, lack of documentation of eligibility
requirements on amended returns, and inecient processes created fertile ground for ERC mills to lure
business owners into ling fraudulent claims. As problems snowballed for the IRS, the agency has had to look
for new solutions to pull itself out from the situation, such as a moratorium on the processing of new claims
45
and procedures allowing taxpayers to withdraw existing claims.
46
e September 14, 2023, news release
announcing the moratorium also stated that the IRS was developing a settlement program for taxpayers who
had received an improper ERC payment and that it would provide more details in Fall 2023. However, as of
the drafting of this Most Serious Problem, taxpayers are still waiting to learn the terms and conditions of the
settlement program. Overall, while it was a dicult assignment for the IRS to develop an ecient method
to manage ERC claims during the pandemic, the path the IRS took led to the current situation. Hindsight
is a wonderful thing, but the ability to understand what caused the challenges and delays is important for the
IRS to understand to make better decisions in the future. Going forward, the IRS should be proactive, ensure
that its guidance and procedures are timely, simple, and practical for both taxpayers and IRS employees, and
address any failures in processes before they spiral out of control.
SOP Initiative 1.7 aims to “[p]rovide earlier legal certainty,” noting that in recent years, the IRS has been
able to provide guidance “only for priority issues, leaving many taxpayers unaware of how the IRS views the
application of the law and whether certain positions will be accepted.”
47
One project in the initiative is to
expand capacity in the Oce of Chief Counsel and the Department of the Treasury Oce of Tax Policy to
Delays Continue to Result in Businesses Not Receiving Pandemic Relief Benefits
https://www.tigta.gov/reports/audit/delays-continue-result-businesses-not-receiving-pandemic-relief-benefits.
SeeIRS Halts ERC Claims Processing Amid ‘Tsunami’ of Fraud, TAX NOTES
.
40 The IRS did not timely address all issues and is still releasing guidance. For example, the IRS only recently, in November 2023,
issued a 14-page legal advice memorandum on whether employers could have relied on recommendations that the Occupational
httdf.
41 Tax Equity: Enhanced Evaluation Could Improve Outreach to
Small Business Owners ERC Audits and the
IRS’s $80 Billion Cash Infusion, TAX NOTES, Oct. 31, 2022, https://www.taxnotes.com/tax-notes-today-federal/compliance/
.
42 AX
NOTES, Apr. 7, 2022, https://www.taxnotes.com/tax-notes-today-federal/credits/employer-org-calls-more-action-erc-processing-
backlog/2022/04/13/7dcpy.
43
hterations.
44 Delays Continue to Result in Businesses Not Receiving Pandemic Relief Benefits
https://www.tigta.gov/reports/audit/delays-continue-result-businesses-not-receiving-pandemic-relief-benefits.
45
https://www.irs.gov/newsroom/
to-protect-taxpayers-from-scams-irs-orders-immediate-stop-to-new-employee-retention-credit-processing-amid-surge-of-
questionable-claims-concerns-from-tax-pros.
https://www.irs.
gov/newsroom/irs-announces-withdrawal-process-for-employee-retention-credit-claims-special-initiative-aimed-at-helping-
businesses-concerned-about-an-ineligible-claim-amid-aggressive-marketing-scams.
47 https://www.irs.gov/pub/irs-pdf/p3744.pdf.
Annual Report to Congress 2023 43
Most Serious Problem #3: IRS Transparency
proactively address more taxpayer questions using both formal and informal legal guidance and rulings. e
second project in the initiative is to develop additional guidance tools to address current challenges and, where
possible, provide greater certainty for taxpayers.
48
ese projects remain largely in the early stages, but they are promising. Taxpayers and tax professionals need
more IRS guidance, both formal and informal. In addition, the IRS needs to continue its work updating
the organization and searchability of IRS.gov to make it easier for taxpayers and tax professionals to nd
applicable guidance once it does become available. Taxpayers and tax professionals often rst look to use
self-help tools and online resources to address tax questions and issues but get frustrated when the available
information is not readily identiable or is buried in pages of links with unclear titles.
49
e IRS’s Oce of Online Services has an ambitious plan of ongoing projects to make IRS.gov content
easier to nd, understand, and use. e projects include user testing, journey mapping, and initiatives to
make content more searchable and improve its placement on the website. A recent joint project by the IRS’s
Taxpayer Experience Oce and the Wage and Investment Division demonstrates the type of improvements
the IRS can make by analyzing gaps in compliance. Following a study indicating that recently divorced
taxpayers, who before divorce were generally in compliance, had begun to receive balance due notices, the
team developed a landing page to centralize information on tax issues relating to divorce with the goal of
providing clear guidance to improve compliance for these individuals.
50
e next steps should be to continue
to study the eectiveness of the page and the eects on compliance for this group of taxpayers and to decide
whether the IRS needs to make further changes.
Reliance on IRS guidance remains an issue.
51
Informal guidance like FAQs and online tools project the
appearance of certainty, but taxpayers can’t actually rely on such informal guidance to defend the merits of
their positions in an audit or in litigation.
52
e IRS is making eorts to become more transparent about
this by adding language to IRS.gov explaining when taxpayers can rely on IRS guidance,
53
but the next step
forward is to minimize or eliminate this uncertainty altogether. Informal guidance should include direct
references to formal law, such as through citations, hyperlinks, or QR codes, wherever informal guidance
advises taxpayers to commit to a tax position. After taxpayers read clear descriptions in informal guidance and
understand the framework for the rules, many will then be able to understand the more technical language
in formal guidance. Such citations also help keep informal guidance up to date and eliminate errors by
facilitating review within the Oce of Chief Counsel and the IRS. Most informal guidance receives periodic
review, but IRS employees do not always have enough time to t a lengthy review into their workload.
SeeIRS.govATIONAL TAXPAYER ADVOCATELOGhttps://www.
taxpayeradvocate.irs.gov/news/nta-blog-irsgov-website-1/ATIONAL
TAXPAYER ADVOCATELOGhttps://www.taxpayeradvocate.irs.gov/news/nta-blog-irsgov-website-2/.
50 IRS, Filing Taxes After Divorce or Separation, https://www.irs.gov/individuals/filing-taxes-after-divorce-or-separation
51 IRS Transparency:
Lack of Transparency About Processing Delays and Other Key Data Frustrates Taxpayers and May Undermine Voluntary
Compliance), https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2023/01/ARC22_MSP_07_Transparency.pdf.
52 Taxpayers can cite their reliance on some informal guidance to seek relief from certain penalties. See IRS, General Overview
https://www.irs.gov/
newsroom/general-overview-of-taxpayer-reliance-on-guidance-published-in-the-internal-revenue-bulletin-and-faqs. See also
Miller v. Comm’r
Leigh Z. Osofsky, The Inequity of Informal Guidancehttps://papers.ssrn.com/sol3/papers.
(arguing that the “two tiers of formal and informal tax law systematically disadvantage taxpayers who
lack access to sophisticated advisors”).
53 In response to a recommendation in the National Taxpayer Advocate 2022 Annual Report to Congress that the IRS clearly state on
all guidance the extent to which the taxpayer can rely on the guidance either for penalty relief or in an audit, the IRS has agreed to
update the IRS.gov reliance webpage to include a reference to other IRS.gov webpages, publications, forms, instructions, and other
types of informal guidance made public by the IRS as subject to the same reliance limitations as FAQs. The IRS will also add a link to
the updated page on the bottom of the IRS.gov homepage under Know Your Rights
Taxpayer Advocate Service44
Most Serious Problem #3: IRS Transparency
Specic, pinpointed citations to underlying law would help IRS reviewers – as well as taxpayers and tax
professionals – more quickly search for applicable legal developments and determine whether the wording
in the guidance is the best characterization of the law. Going forward, the absence of citations in informal
guidance would also indicate when there is no formal guidance directly on point.
The IRS Should Notify Taxpayers of Errors or Programming Changes to IRS Tools, Including
Direct E-File
e IRS intends to expand the availability of tools such as calculators and chatbots as part of its eorts to
create additional informal guidance.
54
A direct e-le system would also constitute an IRS tool, in that its
user prompts and structure would serve as informal guidance that taxpayers would rely on in deciding what
reporting positions to take. IRS tools can be helpful to taxpayers in understanding their obligations, but they
involve some special transparency considerations. Errors in tools can arise even when there are no mistakes in
the interpretation of law, due to the possibility of bugs in the programming. e IRS must identify and x
programming errors just as transparently as any updates it makes to written IRS guidance like FAQs.
In 2023, TAS found that the IRS Withholding Estimator tool was, in some situations, providing estimates
that were erroneously low.
55
is was not due to a misinterpretation of applicable law, rather an issue in
the calculation and display of results. Nonetheless, taxpayers who relied on the tool’s estimate could have
withheld too little, putting them at risk of penalties and additional, unexpected tax due at the time of ling
for which they might not have set aside adequate funds. e IRS corrected the calculation error, but the
Withholding Estimator webpage and FAQs do not yet notify the public of the error.
56
e landing page for IRS tools should include a link where users can nd the history of material changes
to the tool or IRS programing errors, with plain language descriptions of how the changes aect users,
particularly in the case of errors that may adversely aect taxpayers or expose them to risk of examination or
penalties.
57
e IRS should consider adding a comments box directly on the page where users could provide
feedback regarding potential errors or problems they encounter.
Some tools, like an IRS direct e-le system, may be so impactful that the IRS should actively alert prior users
when there are material updates. With a direct e-le system, for example, if the IRS were to modify the
programming during ling season or change the language of user prompts, taxpayers who had already led
their return may be adversely aected and may need an opportunity to le an amended or superseding return.
Tools should advise taxpayers to print summaries for their records in case they later need to prove reliance on
that tool. e IRS’s Withholding Estimator and Interactive Tax Assistant already provide useful summaries
that include the user prompts, user inputs, and the tool’s recommendations. However, neither tool clearly
directs taxpayers to print the summary for their records. As online accounts develop additional functionality,
the IRS should consider creating a feature that allows taxpayers to save these summaries to their online
account and request alerts regarding any material changes to tools they have used.
54
TAS information request. Rather, these tools are included as examples of what the IRS might create, based on existing IRS tools
and news of recent IRS efforts in this area. See, e.g.
https://www.irs.gov/
million-taxpayers.
55 https://www.irs.gov/individuals/tax-withholding-estimator. According to the IRS,
individuals.
https://apps.irs.gov/app/tax-withholding-estimator
https://www.irs.gov/individuals/tax-withholding-estimator-faqs.
57 Sensitive information could be withheld.
Annual Report to Congress 2023 45
Most Serious Problem #3: IRS Transparency
Trust: A Lack of Transparency Can Lead to Taxpayer Skepticism and Reduced Voluntary
Tax Compliance
Taxpayers Need More Information on the Status of Their Claims With the IRS and in the
Resolution of Issues
In focus group sessions on IRS Transparency at the 2023 IRS Nationwide Tax Forums, tax professionals
discussed having diculties reaching someone at the IRS on the phone, getting the IRS to respond to
correspondence, or receiving explanations of the reason for IRS delays.
58
When tax professionals did reach
someone on the phone, they reported that the representatives they spoke with often did not adequately
understand the relevant tax law requirements and could not provide the assistance needed. One tax
professional described calling the IRS to follow up on IRS correspondence on a specic taxpayer issue;
however, each time the tax professional called, the agent could not provide any information on what steps the
IRS had taken or what additional information it needed.
59
Tax professionals in the focus groups also expressed frustration that the IRS did not adequately respond either
to conrm the receipt of information or to keep the tax professionals apprised of developments on claims.
Tax professionals explained that the IRS generally either tells them to allow 30 to 60 days for processing or
sends a letter asking to allow an additional 60 days, a process that may repeat indenitely with no resolution.
Tax professionals stated that they would like an acknowledgment when the IRS receives information or
correspondence as well as dened timelines of when the IRS will follow up.
60
IRS tools like Where’s My Refund?
61
and Where’s My Amended Return?
62
continue to provide only limited
information, primarily indicating whether the IRS received the return, approved a refund, or sent a refund.
In the focus groups on IRS Transparency, tax professionals explained that Where’s My Refund? worked
adequately for simple returns that did not involve problems but that it did not provide helpful information
for returns that had issues requiring further action.
63
e IRS has stated that integrating refund status
information into individual online accounts is a high priority and is currently targeting May 2024 for the
initial release of Where’s My Refund? integration into individual online accounts.
64
e IRS SOP includes plans to provide more up-to-date information on wait times and processing times. e
IRS currently lists some of this information on an “IRS Operations” page on IRS.gov,
65
where it posts updates
on several issues, such as delays in processing returns and amended returns. However, the information on this
page is vague and isn’t presented in a user-friendly format. For example, the page currently states that as of
November 11, 2023, the IRS had 953,000 unprocessed individual returns, including 2022 and 2021 returns
that need review or correction, and that it is taking the IRS more than 21 days to issue a refund relating to
these returns. e next section explains that returns received in the current year with problems could take
more than 120 days to resolve. Many taxpayers in this situation who come to this page for information would
likely have already waited more than the 21 or 120 days described on the page. Providing a minimum period
of delay without information on the expected timing of resolution or a maximum period of delay is not
completely helpful for taxpayers who need to know when to expect an action from the IRS.
Id.
Id.
https://www.irs.gov/refunds.
https://www.irs.gov/filing/wheres-my-amended-return.
https://www.irs.gov/newsroom/irs-operations-status-of-
mission-critical-functions.
Taxpayer Advocate Service46
Most Serious Problem #3: IRS Transparency
When the IRS Makes Inaccurate Statements or Representations, It Should Act Quickly to
Acknowledge and Correct Them
e Tax Court recently granted, in part, a taxpayer’s motion to impose sanctions against the IRS pursuant
to IRC § 6673(a)(2)(B) because “the objective actions of [IRS] counsel [rose] to the level of bad faith” for
the failure to notify the court about a backdated document and not timely correcting the error in LakePoint
Land II, LLC v. Commissioner.
66
e document related to a penalty that required timely written supervisory
approval under IRC § 6751(b). e IRS supervisor had signed the penalty lead sheet in February 2017 but
backdated her signature, making it appear that she had signed it in July 2016.
67
In seeking judgment on
the issue in court, the IRS Oce of Chief Counsel submitted the backdated penalty lead sheet along with a
declaration incorrectly stating that the IRS supervisor had signed the sheet in July 2016. e taxpayer pressed
the issue, and the Oce of Chief Counsel eventually had to concede the backdating of the document and
the inaccurate statements in the declaration. However, the Oce of Chief Counsel delayed its concession for
months after submitting the document and then pivoted to an alternative argument to try to prevail in the
case.
68
ough the Tax Court acknowledged “the actions of [IRS] counsel may have begun as unintentional
and unknowing,” it found that such actions “have multiplied the proceedings in this case unreasonably
and vexatiously,” thereby making the government “vulnerable to liability for the costs, expenses, and fees
attributable to the services of the taxpayer’s attorney’s professional services that are required as an appropriate
response to the misconduct.”
69
Based on the National Taxpayer Advocate’s personal experience as a former employee in the Oce of Chief
Counsel, IRS employees do not intentionally and knowingly misrepresent information, but when operations
or Counsel employees present inaccurate information to a court, the eect on public trust can be long-
lasting. An incident like in LakePoint may give life to speculation about the extent of IRS misconduct
and bad faith, which may undermine public trust and voluntary compliance. While the IRS can’t entirely
forestall such behavior on the part of certain employees, when it occurs, it must take appropriate steps to
take ownership, acknowledge it, and rectify it. It should be noted that on October 11, 2023, the Oce of
Chief Counsel held a mandatory training for all Division Counsel attorneys on how to properly evaluate
evidence of IRC § 6751(b) supervisory approval of penalties for cases in litigation. e National Taxpayer
Advocate commends the Oce of Chief Counsel for taking the issue seriously and taking appropriate steps
so that such mishaps do not happen in the future. However, given that similar allegations of backdating have
now arisen in other cases,
70
the Oce of Chief Counsel should promptly complete the review in regard “of
syndicated conservation easement cases to ensure that the evidentiary record about supervisory approval is
properly presented and that the agency pursues or continues to pursue penalties only where appropriate.”
71
e National Taxpayer Advocate also recommends that the IRS make the ndings public, directly contact any
negatively aected taxpayers, and take the necessary steps to rectify the situation.
72
LakePoint Land II, LLC v. Comm’r
Id.
Id.See also
70 SeeEasement Litigants Allege Penalty Backdating in Three More Cases, TAX NOTES, Aug. 21, 2023,
https://www.taxnotes.com/tax-notes-today-federal/charitable-giving/easement-litigants-allege-penalty-backdating-three-more-
see alsoEasement Litigants Allege Dodgy Penalty Approval by IRS Employees, TAX
NOTES, Oct. 3, 2023, https://www.taxnotes.com/tax-notes-today-federal/audits/easement-litigants-allege-dodgy-penalty-approval-
irs-employees/2023/10/03/7hdtk.
71 LakePoint Land II, LLC v. Comm’r
https://www.taxnotes.com/tax-notes-today-federal/conservation-easements/irs-partnership-reach-settlement-conservation-
.
72 As these events were unfolding, the Treasury Department issued proposed regulations and a proposed legislative amendment to
the taxpayer protections provided by the statute. This is addressed further in two legislative recommendations in the National
Compilation of Legislative Recommendations to Strengthen Taxpayer Rights and Improve
.
Annual Report to Congress 2023 47
Most Serious Problem #3: IRS Transparency
CONCLUSION AND RECOMMENDATIONS
Taxpayers, tax professionals, stakeholders, and industry expect and deserve a well-functioning tax system based
upon fairness and equity that protects taxpayer rights and ensures everyone pays their fair share of taxes. A
transparent and ecient tax administration will build taxpayers’ trust in the IRS, resulting in an eective and
fair voluntary tax system that fully implements the Taxpayer Bill of Rights.
e funding in the IRA provides a unique opportunity to modernize, and the IRS cannot aord to waste it
or lose the trust of Congress and taxpayers. e IRS needs to adopt a long-term focus in its reform eorts,
provide clear and specic data on its modernization plans and progress, and develop lasting channels of
communication that allow for feedback from external stakeholders. It needs to increase its capacity to issue
clear and timely guidance and continue working on improvements to IRS.gov to make such guidance easier
to access. Finally, the IRS needs to improve its processes for responding to taxpayer and tax professional
inquiries to consistently provide knowledgeable, prompt, and helpful information that correctly answers
questions or advances the resolution of issues and gains the trust of the American people.
Administrative Recommendations to the IRS
e National Taxpayer Advocate recommends that the IRS:
1. Provide quarterly updates of milestones accomplished and an annual report updating the SOP.
Include performance metrics for stated objectives that will allow for the evaluation of outcomes,
including specic deadlines on when the IRS will meet these objectives.
2. Provide specic and veriable details on the Direct File pilot; the number of taxpayers utilizing the
tool; processing successes, issues, and lessons learned associated with the tool; and the costs of a direct
e-le system.
3. Set up a centralized location on IRS.gov to inform the public of requests for feedback on
modernization initiatives, with information on how to submit comments.
4. Add information to IRS tools notifying taxpayers when the IRS has made material changes and
updated features.
5. Develop processes to more consistently and timely acknowledge the receipt of taxpayer
correspondence and provide accurate timelines on when the IRS expects to respond or act.
6. Provide weekly information throughout the year on ling season statistics, including the total number
of returns in inventory, number of returns held beyond normal processing times, number of returns
in suspense status, and the anticipated timeframes for working through them while acknowledging
that the situation is uid and timeframes may change along with circumstances.
7. Publicly disclose the ndings of its review of syndicated conservation easement cases on the potential
backdating of penalty documents.
RESPONSIBLE OFFICIALS
Douglas O’Donnell, Deputy Commissioner, Services and Enforcement
Kenneth Corbin, Commissioner, Wage and Investment Division, and Chief Taxpayer Experience Ocer
Teresa Hunter, Chief Financial Ocer
Karen Howard, Director, Oce of Online Services
David Padrino, Chief Transformation and Strategy Ocer
William Paul, Acting Chief Counsel
