IRS to test video visits with preparers to curb tax credit errors

The Internal Revenue Service is being urged to pilot test virtual visits with paid tax preparers through videoconferencing technology as a way to reduce the number of errors in claims for refundable tax credits in a new government report.

The report, released Thursday by the Government Accountability Office, noted that the pandemic and staffing shortages have reduced the IRS’s ability to visit tax preparers in person this past year to educate them about improving tax compliance. The GAO recommended the IRS test using videoconferencing for such visits and expand its use if it turns out the benefits outweigh the costs, and the IRS agreed.

Many such visits come after the IRS uncovers problems with refundable tax credits like the Earned Income Tax Credit, the Additional Child Tax Credit and the American Opportunity Tax Credit. The IRS estimates that 23% of the payments it issued to taxpayers in fiscal year 2021 for refundable tax credits were made in error, costing about $26 billion. The IRS has traditionally visited tax preparers in person to educate them about compliance or ask for evidence of their compliance, but due to COVID-19 and staff shortfalls, the IRS suspended educational visits and reduced its number of compliance reviews in fiscal years 2021 to 2022.

The report comes as the IRS has faced numerous challenges this past year stemming from the pandemic and staffing shortages, with the IRS confronting a backlog of millions of tax returns left over from last year. 

“Recent declines in the number of knock and talk visits and due diligence visits conducted through IRS’s Refundable Credits Return Preparer Strategy have limited the amount of revenue IRS can protect from improper claims of refundable credits and other tax benefits,” said the report.

IRS officials told the GAO that in-person visits give the agency an opportunity to interact with preparers, identify problems, and help improve compliance with due diligence requirements. Those requirements are set by law and help ensure accurate preparation of tax returns when tax clients claim certain refundable credits and tax benefits. 

“While due diligence visits and knock and talk visits can be the most expensive compliance effort, they help [the] IRS address millions of dollars in potentially improper claims at a relatively low cost,” said the report.

From fiscal years 2017 to 2020, the IRS estimated such visits protected about $118 million of tax revenue per year on average at an average cost of $3.3 million per year.

The IRS's Refundable Credits Return Preparer Strategy includes pilot testing of new compliance actions most years, and the annual planning process occurs during the summer months. Thus, the GAO took the opportunity Thursday to release a report recommending the IRS should consider including a videoconference pilot as part of its Refundable Credits Return Preparer Strategy for the upcoming fiscal year. While the IRS agreed with the GAO’s recommendations, IRS officials said they haven’t actually tested a videoconferencing option for preparer visits and they raised questions about its potential benefits and challenges.

The GAO argues that videoconference visits could help the IRS mitigate in-person restrictions in the near term and offer extra benefits over the long term such as increased flexibility, modernization of IRS compliance activities, and operational cost savings. 

“Without plans to test videoconferencing visits with preparers, IRS will remain limited in its efforts to address preparer noncompliance,” said the report. “It may also miss opportunities to innovate its compliance actions and align with agency-wide efforts to expand digital services to taxpayers and professionals.”

The GAO recommended the IRS should pilot test and evaluate the costs, benefits and challenges of using videoconferencing technology for its education and compliance visits with preparers, and if the benefits outweigh the costs, it should further implement the use of videoconferencing. The IRS agreed with the report’s recommendations but contended that its current in-person due diligence and “knock and talk” visits were already working to safeguard tax revenue. The visits are in person, as well as by phone and correspondence. The “knock and talk” visits are estimated to protect an average of $14 million per year in tax revenue for fiscal years 2017 to 2020, while the due diligence visits protected an average of $104 million a year. “For correspondence [due diligence visit] reviews, requested documents are mailed or faxed to the employee performing the review,” wrote IRS deputy commissioner for services and enforcement Douglas O’Donnell in response to the report. “The same process would be followed if videoconference technology is used for future treatments.”

However, he acknowledged that each year modifications to the program are implemented to reflect lessons learned in prior years and test new methods to improve tax preparer compliance. “We will explore the feasibility of the recommendations made in the report,” he added.

The IRS has used videoconference technology in the past to provide taxpayer service at its Taxpayer Assistance Centers, but a 2018 report from the Treasury Inspector General for Tax Administration found that relatively few taxpayers were taking advantage of it and usage had been declining for several years (see story). However, last year the IRS’s Large Business and International division began using videoconferencing to meet with big companies virtually to resolve their tax issues (see story).