The fate of a government agency’s funding is always precarious—and especially so for the Internal Revenue Service, one of the most unpopular federal agencies in the United States. That’s why it’s imperative that the IRS monitor, evaluate, and regularly report its performance. In a new report, I describe a holistic approach to performance measurement that improves on earlier approaches including those outlined in the IRS’s 2023 and 2024 Strategic Operating Plans.
In the 2022 Inflation Reduction Act (IRA), Congress invested nearly $80 billion in the IRS over ten years as a supplement to the agency’s regular appropriations. After over a decade of budget cuts (in inflation-adjusted dollars), the IRS needed the funds to deliver on its mission to “provide America’s taxpayers with top quality service by helping them understand and meet their tax responsibilities and enforce the tax law with integrity and fairness to all.”
But given the agency’s perennial unpopularity, support for the IRA funding was not strong enough to withstand calls for rollbacks, and Congress rescinded 25 percent of IRA funding in the following two years and froze the agency’s regular appropriations. The IRS had no time to demonstrate the impact of Congress’s long-term investment.
If the IRS can demonstrate future success, it will be better positioned to secure the remaining IRA funding and avoid further cuts. And solid performance metrics reveal areas for improvement—crucial for the IRS to evolve into a top tax agency suited for the 21st century.
Yet, performance measures outlined in the IRS’s Strategic Operating Plans are incomplete. And earlier performance measures—a patchwork of unrelated items—leave room for misinterpretation (for examples of those metrics, see Table 3.2 in the IRS’s Congressional Justification report).
The IRS performance measures can be made more informative with the right refinements. For example:
Taxpayer satisfaction. The IRS tracks overall taxpayer satisfaction with the agency, but this broad measure provides no insight into the sources of taxpayer satisfaction and dissatisfaction. User experience surveys with more detailed questions could better guide the IRS in its interactions with taxpayers.
Compliance burden. The IRS measures the costs to taxpayers of filling out forms issued by the agency, but its surveys omit the burdens imposed by other interactions, like waiting for an IRS employee to answer a phone call or responding to an IRS notice requesting more information.
Moreover, “compliance burden” is a misnomer: The measure does not distinguish between the costs incurred by compliant taxpayers and the expenses of noncompliant individuals who spend time and money figuring out illegal ways to reduce their reported taxable income.
Expanding surveys to cover other types of activities would fill in some gaps. Linking data on tax burdens and compliance would provide insight into the trade-offs between the IRS’s service and enforcement missions.
Telephone calls: At least twice a year, the IRS releases information on the percentage of calls that customer service agents answer. But one figure covers just the filing season, and the other covers the entire year. Consequently, they can greatly differ because the IRS’s service priorities change during the year.
Providing more detailed information throughout the year about shifts in priorities and activities could reveal more about the IRS’s trade-offs—for example, between answering the phones and reviewing taxpayers’ responses to notices.
Tax gap. The IRS enforces the tax code, but complex laws and funding cutbacks open opportunities for evasion that bump up the tax gap. The agency should develop a methodology for tax-gap measurement that distinguishes between its role in enforcing the tax code from factors that are beyond its control.
Audit rates. An oft-cited performance measure, audit rates provide no information on the quality of an examination. A less visible metric is the no-change rate, or the percentage of audits resulting in no changes in taxes owed.
A low no-change rate may demonstrate that the IRS is doing a good job selecting tax returns to examine. But it may also reflect taxpayers’ lack of resources to successfully challenge an examiner’s finding of underpaid taxes. Accompanying no-change metrics with more in-depth investigation of taxpayers’ responses to audit notices would shed more light on the quality of the IRS’s enforcement methods, not just their number.
Return on investment. Until the recent debates over IRS budget shortfalls and funding boosts, the returns on investments (ROI) in the IRS received little attention. The new interest in ROIs has focused on shortcomings in the historic measures: As outlined in a recent study by a Treasury economist and other researchers as well as in an IRS report, not all benefits have been included in the estimates, but neither have all costs. A more comprehensive measure could better inform decisions about both the level and allocations of the IRS budget.
Fairness measures. Challenges to measuring the IRS's effectiveness in meeting its service and enforcement missions are compounded when analyzing differences across groups of taxpayers. Improving the aggregate measures and determining how to capture differences more accurately by income or racial groups will provide more insight into whether the IRS also meets its mission to treat taxpayers equitably.
Mission-related performance metrics are essential to judging lawmakers’ investments in the IRS. But first, the IRS could be more transparent when releasing performance metrics about flaws in the data. That transparency can set the stage for fundamental changes to the way the IRS operates, allowing it to better meet its mission to provide support to taxpayers, enforce the tax code, and treat all taxpayers fairly.
