Policy Expert Offers IRS ‘Holistic’ Performance Metrics

The IRS’ objectives outlined in its Strategic Operating Plan (SOP) for spending the 10-year appropriation of agency funding from the Inflation Reduction Act (P.L 117-169) are “neither comprehensive nor cohesive” when taken altogether, according to Tax Policy Center (TPC) Senior Fellow Janet Holtzblatt, who suggested the IRS take a more “holistic” approach in aligning its goals with an emphasis on transparency and workable measures of success.

Holtzblatt in a September 19 report published by the TPC of the Urban Institute and Brookings Institution suggested refinements to the current “patchwork” of “incomplete” performance metrics in the SOP now that roughly 25% of the original $80 billion in funding has been clawed back by Congress. The SOP, said Holtzblatt, mainly describes spending targets over the next few years and does not convey a long-term vision over the course of the full 10-year period through fiscal year 2031.

A common criticism the IRS received after releasing the SOP is the plan suffers from overall vagueness because it fails to “provide specific metrics or targets for evaluating the agency’s performance in achieving many of the plan’s goals-either for the specific initiatives or for the entire plan once fully implemented.”

For example, the surveys the IRS relies on to track “compliance burdens” – the costs incurred by taxpayers to interact with the agency such as filing required tax forms – omit certain key factors that impact taxpayers and their wallets. According to the report, the IRS first started using surveys conducted using a random sample of taxpayers in the 1980s. The surveys would ask taxpayers to share how much they spend on meeting their tax obligations and how they personally go about learning the law and understanding all related requirements. A third-party, the Arthur D. Little (ADL) company, would use its ADL mathematical model to match tax records with the respondents.

But the surveys eventually grew outdated because they would not ask about payments made to tax preparers and did not account for the shift away from paper returns to electronic filing. The ADL model is still used in some cases but the IRS in 2003 started using a newer model with an overhauled process for compiling data on compliance costs paid by both individuals and businesses.

This newer model is an improvement because groups of taxpayers surveyed are broken down into more categories like the complexity of their tax situation, the report found. Taxpayers are also asked to provide details on out-of-pocket expenses as well as time spent conducting tax-related activities. In policy discussions, a figure that frequently is cited is that taxpayers spend on average $270 and 13 hours each year, which was estimated using the current model.

Yet, even these modern measures “fall short of measuring the IRS’s performance in providing taxpayer services-as well as the burdens of interacting with the IRS during an enforcement action,” read the report. Time spent waiting on hold when calling an IRS customer service phone line or for the agency to respond to a notice are pain points for taxpayers but are not considered in the current model, nor are “postfiling interactions” with the agency.

The report also argued that the complexities and burdens placed on those who are not required to file but may still have benefited from benefits like a refundable should also be weighed. Calling the term “compliance burden” a “misnomer,” Holtzblatt suggested a revised model better differentiate between the costs incurred by compliant and noncompliant taxpayers.

“The costs involved in an audit can be viewed as part of the penalty when the affected taxpayer is, in fact, noncompliant, but they are unambiguously a burden when the compliant taxpayer must undergo the pain of an unnecessary examination,” she wrote. “Linking the measure of compliance burdens to noncompliance research, if possible, would enable the IRS to distinguish between costs incurred by compliant and noncompliant taxpayers.”