The Internal Revenue Service’s (IRS) mission is to provide American taxpayers with top-quality service by helping them understand and meet their tax responsibilities; it is also responsible for enforcing tax laws. After facing declining resources and increased workload for many years, in 2022, the IRS was appropriated tens of billions of dollars in funding over 10 years to modernize its operations and improve service and enforcement. There are a number of areas that IRS needs to address in doing so.
For instance:
Customer service and processing. The IRS has struggled to provide customer service and process returns in a timely manner in recent years. The agency has continued to struggle to meet taxpayer service needs, including balancing telephone and correspondence services. For example, the IRS was late responding to taxpayer correspondence more than half the time. Its reliance on manual processing significantly affected its performance in processing tax returns and delayed refunds in 2021 and 2022. Finally, IRS has challenges hiring staff to process tax returns.
Millions of Taxpayers Await Responses From IRS
Third-party information. IRS estimated that $496 billion in taxes are not paid on time each year. After collecting late payments and taking enforcement actions, IRS can only collect about $68 billion of that amount. However, there are other steps IRS can take to help improve its enforcement and help taxpayers pay what they owe. For example, IRS gets billions of information returns from employers, banks, and other sources, which provide information on taxpayers’ income. But this system isn't managed strategically—returns come on paper and electronically, with different due dates, and are used by different compliance programs managed in different IRS offices.
Audit rates. IRS audits individuals to verify if they accurately reported their taxes and, if they didn't, to determine if more taxes are owed. Audit trends vary by taxpayer income. In recent years, IRS audited taxpayers with incomes below $25,000 and those with incomes of $500,000 or more at higher-than-average rates. But audit rates have dropped for all income levels—with audit rates decreasing the most for taxpayers with incomes of $200,000 or more. IRS officials said audit rates declined due to staffing decreases and because it takes more staff time and expertise to handle complex higher-income audits.
Partnership audits. More businesses have been organizing as partnerships. This allows them to pass income and losses to their partners instead of being taxed as corporations. Between 2002 and 2019, the number of large partnerships—with over $100 million in assets and 100 or more partners—increased almost 600%. The IRS’s audit rate for large partnerships has dropped to less than 0.5% since 2007, and about 80% of audits conducted don't find any problems. This may suggest that IRS isn't choosing the riskiest returns to audit or doesn't know how to find noncompliance in these businesses.
IRS Audited Fewer Large Partnerships for Tax Years 2007-2019
Data safeguards. Taxpayers expect IRS to protect their sensitive personal and financial information. If taxpayers are not confident that IRS will do so, they are less likely to comply with tax laws. While IRS has several safeguards in place to protect taxpayer information, it has several issues. For example, among the 14,000 contractors IRS assigned to the Insider Threat Awareness program, only 66% completed training on how to handle taxpayer information.