The IRS measures success by refunds, but businesses experience a different agency

The IRS takes a self-congratulatory victory lap for its customer service in a recently issued report by the IRS's own National Taxpayer Advocate. But from the standpoint of the agency's most important customers, the service isn't serving nearly as well as the report suggests.

The problem for all Americans is that the people who actually pay the lion's share of taxes are getting the worst service — and that's not good for the tax system. The report says that 140 million returns were filed and more than 90 million refunds were issued so far, and goes on to conclude that "the IRS performed better than expected in most respects." 

But refund speed is the wrong measure of performance for the IRS. Getting fast refunds of withheld dollars for the roughly 40% of American households that pay no net income tax isn't a sign of triumphant service. 

For business owners, investors and high earners — America's real tax base — the results haven't been nearly as rosy. Tax practitioners like me are watching in frustration as those high-dollar taxpayers are hammered by remarkably poor service from the IRS. 

Any private business treating its highest-paying customers this way would fail. But at the IRS, it seems like a core strategy.

What's gone wrong for high-income taxpayers

Business returns, audits and errors are taking months (and in some cases, years) to resolve. Some press reporting has blamed the phenomenon on the DOGE-era cuts. 

But while those cuts certainly didn't help the situation, the very same National Taxpayer Advocate's 2022 report noted that COVID's staff dispersals had caused a major degradation of customer service. Arguably, the IRS has never recovered. 

But the problem is more insidious for these taxpayers than just frustration, or just higher bills from their tax advisors and accountants as a result. Because when the IRS finds what it believes are unpaid taxes or failure to report certain income, it begins imposing interest charges and eventually penalties. 

And while the IRS is failing to deliver answers to those taxpayers, the interest clock doesn't stop. Penalties keep accruing and taxpayers are left with uncertainty over large sums of money hanging in the balance, with no answers to their questions available from any source at the service.

Root causes

The IRS uses automation to select returns and generate notices, and human review is inconsistent and often comes later. But with a demoralized workforce culture (as multiple IRS employee Reddit threads make clear) complex problems seem to compound. 

Notices arrive that are inaccurate or incorrect, and as a Treasury Inspector General report noted just last month, it's extremely difficult to use the IRS's phone systems to find anyone to talk to about it. 

Taxpayers' issues, which overwhelmingly come from more complex returns generated by high-income taxpayers, fester with no way to resolve the problems.

As a result:

• Audits drag on for years: National Research Project audits (line-by-line examinations of returns) are taking three years to complete. These audits supposedly target taxpayers randomly to generate data for the IRS's AI systems, but the burden falls disproportionately on successful business owners.
• The IRS culture problem keeps getting worse, and high-income taxpayers bear the brunt: Former IRS attorneys describe an internal culture where agents are taught that if they don't understand something, it must be illegal. Taxpayers don't get the benefit of the doubt, and amended returns get denied without requests for documentation or explanation.
• No accountability: The IRS can alter a taxpayer's financial life with levies, penalties, fines and interest. But agency officials aren't held to any reciprocal standard. Fighting in court drains resources because the IRS is replete with in-house attorneys while a taxpayer is forced to pay legal fees that can run into the hundreds of thousands of dollars. 

Tax practitioners are busier than ever, but the work is increasingly about navigating dysfunction rather than providing value. Meanwhile the breakdown in confidence in the integrity of the IRS and the entire tax system creates added incentive and emotion for non-compliance.

Fixing the problem

The fix requires leadership from both the executive and legislative branches. It will take an IRS commissioner deeply supported by the president who nominates them. It will require knowledge of the system, passion for reform and a willingness to fight the entrenched bureaucracy. 

But it will also require a Congress that doesn't repeatedly write and enact complex tax legislation that it doesn't understand and that brings new complications and loopholes with every iteration. 

Veteran tax practitioners describe this as the most frustrating period they've seen, even as the IRS declares this filing season a great success. But any private business that treats its highest-value customers the worst will fail — just as the IRS has been faltering.