Virtual Face-to-Face Audits: A prescription for curing the IRS’s ailing correspondence examination process
Over the last few weeks, I’ve written about the problems associated with the Internal Revenue Service’s correspondence examination program. These problems include:
- Confusing audit notices that result in low response rates and high rates of default tax assessments; and
- An automated examination process in which no one IRS employee is assigned to work the case and is accountable for answering taxpayer questions, reviewing taxpayer responses and requesting additional information if required, and reaching the correct result.
While the IRS instituted correspondence or “corr” exams in an effort to conserve its resources and minimize taxpayer burden, IRS customer satisfaction surveys and Taxpayer Advocate Service (TAS) research studies have consistently shown that for the majority of taxpayers subject to this method of auditing – many of whom are low income and unrepresented – corr exams are an unnavigable labyrinth. In fact, in a statistically representative survey of Earned Income Tax Credit (EITC) taxpayers who had been audited, over 70% said they would prefer some other audit method than correspondence. See “IRS Earned Income Credit Audits – A Challenge to Taxpayers,” in the National Taxpayer Advocate's 2007 Annual Report to Congress, Volume 2 (pages 106-107).
Before we look for alternatives to audits solely by correspondence, let’s review what the IRS – and we as the taxpaying public – hope to achieve by auditing taxpayers. Certainly, we want to ensure that the audited taxpayer pays the correct amount of tax due under the law. But because audited taxpayers have been selected because the IRS suspects they made errors, shouldn’t we also want these taxpayers to understand what those errors are, why their returns are incorrect, and how to file correctly in the future? And wouldn’t we want to be sure that our exam processes are designed to elicit the correct result, and are at least flexible enough to consider different ways of proving a taxpayer’s tax return position? After all, taxpayers are a very diverse group. Shouldn’t a tax agency be able to accommodate its taxpayers’ diverse abilities to read, communicate orally, obtain documentation, and explain themselves?
All of the above exam goals require some sort of dialogue with taxpayers. As anyone who has looked at both the literacy levels of the United States population and the poor quality of IRS exam notices can attest, there is not a whole lot of communicating going on in IRS correspondence exams.
The answer to these problems is not to give up on corr exams and replace them with IRS audits in taxpayers’ homes and businesses. Instead, we need to harness technology so that taxpayers and the IRS can recreate a face-to-face office audit – virtually.
In 2009 I spent a week meeting with officials of the Swedish Tax Agency and the Swedish Enforcement Agency in Stockholm. In order to provide quality assistance to taxpayers in remote areas of the country (15% of which is above the Arctic Circle), the Swedish Tax Agency tries to arrange a room in whatever government building is located in the remote community. There, a taxpayer can log on to a computer and speak with the appropriate tax agency employee. This “Virtual Service Delivery” (VSD) approach includes high-resolution cameras so taxpayers can hold up documents and the employees can see them, determine whether the documents are relevant to the matter under review, and make specific suggestions about what more is needed to resolve the matter – all in real time.
As a result of our meetings with Swedish tax officials, the Taxpayer Advocate Service (TAS) has launched a pilot to test this approach. Although TAS has 75 offices around the United States, including Puerto Rico, there are concentrations of underserved taxpayers far from any TAS office. One such area is Tampa, Florida, where TAS cases are generally worked in our Jacksonville office. We have arranged to use a room in the Tampa IRS office to offer virtual service to taxpayers in that area.
Today, if a taxpayer in Tampa requests TAS assistance, he or she can go to the local IRS office, log on to the computer in our room there, and speak face-to-face with a case advocate in Jacksonville. We have a fax machine nearby, so the taxpayer can fax us any documentation he or she may have brought, and we can receive and review that documentation in Jacksonville while the taxpayer is online with us in Tampa. We can discuss what else we need the taxpayer to do, we can answer the taxpayer’s questions and explain the next steps for case resolution, and we can see whether the taxpayer understands what we are saying. In short, we can have a virtual face-to-face dialogue with the taxpayer.
This technology has the potential to radically transform the corr exam process and, more importantly, the relationship between the taxpayer and the IRS. Envision this: a taxpayer under audit receives a clearly worded audit notice, providing the taxpayer with the option to make an appointment with a tax examiner for an online meeting. The taxpayer gets a sign-in PIN and can log on from his or her home or office computer, or can go to the closest IRS office and log on from a computer specially dedicated to that purpose, or can even go to a specially designated room in another government building (e.g., post offices, Social Security offices, or tribal government offices). If the computer has a high-resolution digital camera, the taxpayer can display and the IRS can digitally record relevant documentation, eliminating the delays in mail handling and faxing. (Or, the taxpayer could take a digital photograph of the documentation with his or her smartphone and email the photo to the IRS.) The tax examiner who conducts the meeting retains the case and makes the determination. All future correspondence contains the name, phone number, and email address of that tax examiner.
This approach (which can also be used in Automated Collection System cases and campus Appeals cases) combines the benefits of face-to-face office audits (higher response and agreement rates, higher customer satisfaction) while preserving some of the cost savings of corr exam (centralized locations, automated processing before and after the online audit). The back-and-forth conversation with the tax examiner will enable taxpayers to explain themselves better, increase the likelihood they will provide appropriate documentation, and improve the accuracy of the result. Taxpayers will also understand their appeal rights better, because tax examiners would be required to explain them. Moreover, tax examiners will be more likely to view taxpayers as people who are attempting to comply with the laws and need some help to achieve that compliance, rather than as mere pieces of paper (the tax return).
All the IRS needs to accomplish this is a plan, along with the funds to upgrade and equip its computers to capture high-resolution digital images. That’s where Congress comes in. To bring the IRS into the 21st century and keep the faith with the U.S. taxpayer, the IRS needs the funds to adopt this technology and incorporate it into all of the remote, centralized enforcement and service functions it conducts less effectively today. This virtual meeting technology is used today for all sorts of applications, including Social Security and Veterans Administration benefits hearings, and remote medical diagnostics.
It’s time we provide this service to our taxpayers, enabling them to get the assistance and results they deserve. Neither individual nor business taxpayers should have to pay taxes they don’t owe simply because the method of auditing or collecting precludes effective communication and accurate results.