One component of the National Taxpayer Advocate’s annual reports to Congress that doesn’t receive as much attention as it should is the research studies we conduct and present. It’s hard to overstate their value. As the IRS seeks to transform the taxpayer experience and fix problems, well-designed research that scopes problems and explores solutions is essential.

Today, we are publishing the research volume of our report. It contains two completed research studies and a description of the design for a third study we will conclude in the coming months.

• Online accounts. Taxpayers and tax professionals routinely criticize IRS online services as deficient, but what exactly should an online account contain? We’ve reviewed the online accounts offered by several state and foreign tax agencies to see what they offer, and we’ve talked to taxpayers to ask their preferences about account features and their opinions of the existing IRS account.
• Two-year ban on refundable credit eligibility. The tax code imposes a draconian penalty on taxpayers who improperly claim key refundable credits if the IRS determines the taxpayers claimed the credits due to reckless or intentional disregard of rules and regulations. These taxpayers can’t receive the credit in the following two years even if they otherwise meet all the eligibility requirements. Given the harshness of this penalty, the IRS has established internal procedures to ensure the penalty is only imposed in appropriate cases. We’ve heard anecdotally that the IRS doesn’t always follow these procedures, so we took a closer look.
• Failure of eligible taxpayers to receive refunds where their returns were erroneously flagged for identity theft. Each year, IRS filters flag several million returns as potentially submitted by identity thieves and freeze the associated refunds pending identity verification. Historically, more than half the flagged returns turn out to be “false positives” – meaning the individual who submitted the return was the correct taxpayer and was entitled to the claimed refund. IRS procedures call for the agency to send one letter to notify the taxpayer the refund won’t be paid unless the taxpayer verifies his or her identity, but if the taxpayer doesn’t respond, the IRS never pays the refund. Given the rate of undelivered mail and the non-response rate to IRS notices generally, how many taxpayers don’t respond to these notices and never receive the refunds to which they’re entitled? We’re looking at that now.

Read more detailed descriptions of these important research studies below. Access the full research studies here.

Research Study 1: Taxpayer Opinions of IRS Individual Online Accounts and a Review of Online Accounts and Web Services Offered to Businesses and Tax Professionals by U.S. State and Foreign Country Taxing Authorities

This research report is a continuation of a study we published in 2022 detailing the features of individual online accounts offered by state tax agencies and a few foreign tax agencies. The first part of this year’s report discusses the findings of several in-depth interviews with taxpayers about what features they would like to see in an individual IRS online account, including expected security protocols, and their opinions of the current features of the IRS online account. The second part of the report discusses the online account features for businesses offered by state taxing agencies and a few foreign tax agencies and the online features offered to tax professionals as they assist their clients.

For online account features for businesses, we found the IRS website offers limited services to only some types of business taxpayers while many states and countries reviewed offered far more. Although additional services are available outside of an online account, we conclude that the IRS should expand the services and eligible populations for business online accounts while also protecting taxpayer data and establishing protocols as to whom within the business will have access to the account.

For online account features for tax professionals, we found many entities offer access to tax professionals through their online accounts, allowing for access to client records and the ability to act on their behalf. However, these professionals cannot generally interface online with the IRS regarding their clients’ returns unless their clients access their online account. This prevents many tax professionals from providing adequate service to their clients. Ideally, through a Tax Pro account and appropriate authorization, tax professionals should have the ability to access their client’s tax information through one portal. We found that some states allow Power of Attorney online account access without requiring the client to be online.

The IRS can continue to learn from a review of the digital services offered by others, finding common ground, inspiration, and lessons learned for future improvements.

Research Study 2: Study of the Two-Year Bans on the Earned Income Tax Credit, Additional Child Tax Credit, and American Opportunity Tax Credit

The tax code authorizes the IRS to ban taxpayers from claiming certain refundable credits (the Earned Income Tax Credit (EITC), the Additional Child Tax Credit, and the American Opportunity Tax Credit) for two years if it determines that the taxpayer claimed the credit due to reckless or intentional disregard of rules and regulations. A review of a representative sample of cases in which the IRS imposed the bans as a result of audits closed in fiscal year (FY) 2022 or through the first eight months of FY 2023 shows the IRS often did not follow its own procedures. Improperly imposed bans deprived taxpayers of significant tax benefits if they were otherwise eligible for a credit in the ensuing two years. Particularly in the case of the EITC, which is only available to lower income families and can be worth around $7,000, erroneous denial of EITC claims for two years can impose or exacerbate financial hardships. This study follows up on earlier research projects and revisits the IRS’s adherence to its procedures when imposing the two-year ban.

Research Study 3: Study of Potentially Legitimate Taxpayers Who Did Not Receive a Tax Year 2020 Refund Because They Did Not Respond to an IRS Letter Requesting They Verify Their Identity

The primary purpose of this study is to determine whether legitimate taxpayers are not receiving refunds to which they are entitled due to IRS fraud filters freezing their accounts and withholding payment. Each year, the IRS freezes millions of refund returns with characteristics indicative of a potential identity thief having filed the return. However, about half of these returns turn out to be “false positives” and are authenticated by the legitimate taxpayer as properly filed returns.

TAS selected a sample of nearly 4,000 taxpayers by state and territory in combination with adjusted gross income (AGI) percentile ranges. These taxpayers often reported low AGIs  and claimed over $500 million in total unreceived refunds with a median refund of about $1,800. Over a quarter of these taxpayers claimed the EITC, with a median EITC claim of more than $400. As these data points show, a substantial number of taxpayers with low or modest incomes likely in need of claimed refunds and credits are affected by the IRS’s broad identity theft filters and potential gaps in customer service.

Since 2021, the IRS only sends a single letter asking the taxpayer filing a return suspected of identity theft to authenticate their identity and verify their tax return information before it will release the claimed refund. TAS is exploring whether legitimate taxpayers who did not respond to an IRS letter will respond to TAS’s outreach letter offering assistance with navigating the IRS’s identity authentication process so they can receive their tax year 2020 refund. The study will explore the frequency with which taxpayers receiving the letter respond to TAS, how often respondents can successfully complete the IRS identity authentication process, and the amount of money refunded to these taxpayers.

TAS mailed these outreach letters in early December 2023 and sent a follow-up letter in early January 2024 to taxpayers who did not respond to the first outreach letter. TAS will track both the number of respondents and whether the taxpayer could successfully verify their identity and tax return information to release the frozen refund. TAS will report the results of this study later this year.

In conclusion, research in tax administration is crucial for improving efficiency, equity, and compliance within the tax system. TAS research helps to identify effective strategies to improve tax administration, seeking to align IRS procedures with community needs and the financial circumstances of taxpayers. These are our current research studies, but we invite you to review our many past studies here.