Early last month, the Internal Revenue Service admitted that its telephone assistance people were giving taxpayers wrong answers to tax questions 30.8 percent of the time. But the agency held out the assurance that if taxpayers were penalized for any resultant errors on their returns, the penalties would be waived.
Seems a very decent, human approach. It even reiterates last year's admission of errors and last year's promise to waive penalties.But don't count on it. There are qualifications and amplifications: The errors may not be errors, the penalties are unlikely, the number of waivers sought or granted is unknown, and the chance of actually getting a waiver is unsure. It's like the old joke about the broken cup: I never saw your cup, I didn't take it, I put it back, and anyway, it was already cracked.
The first haggle is the number of errors, a matter of some importance when an advisory service handles 38.8 million telephone calls and 7.4 million walk-in inquiries a year. In recent years, as the IRS's 5,000 assistors, many part-time and seasonal workers, struggled with all the changes in tax code since the 1986 Tax Reform Act, error rates as polled in popular periodicals went above 30 percent. A Money magazine survey last year drew 45 wrong answers to 100 inquiries, 41 this year.
The government's General Accounting Office has also been making test calls, as requested by Congress, to tax assistors since 1978, asking them questions that involve tax law - typical taxpayer questions about IRA contributions, business expenses, kiddie taxes. In the 1987 filing season, the GAO found a 21 percent error rate, in 1988 a 36 percent error rate, and this year, 1989, 35 percent errors.
But this year, the testing was done in concert with the IRS, which will eventually take it over. The IRS, using the same 62 questions, found only a 30.8 percent error rate. The reason: The IRS judged an answer correct if the final advice was right. The GAO scored the whole process, including the "probing questions" posed by assistors. "If they quickly gave the right answer but didn't ask the right questions," says Jennie Stathis, the GAO's director of tax policy and administration, "it would be (counted) wrong. We try to put ourselves in the position of the taxpayer."
A question about qualified dependents, for example, should elicit probing questions about all five requirements for dependency; most minor children of Nebraska residents will be U.S. citizens, but if the citizenship isn't questioned, someone unqualified might get the assistor's approval. The IRS response is that most such conclusions will fit the inquiry and furthermore, the testing situation is skewed: "Testers don't give any information unless it's probed for," says IRS spokesman Frank Keith in Washington. "The taxpayer will keep asking `What about this, and what about that?' "
The GAO's questions, moreover, all involve tax law, and such questions generally constitute less than half the actual inquiries received. The majority are either procedural (what forms to use, where to send a return) or account-related (where is a refund, what does a notice really mean). Such questions are monitored regularly by IRS regional managers, who listen in on random assistance calls, taking notes, and making judgments that might result in discussions with the individual assistor, a general tip to all local assistors, or required training sessions. They even judge question-handling, i.e., the probing questions as well as the final answers.
Given the emphasis and grading system, the GAO surveys, says Keith, are "not an indictment of the taxpayer service." As for the penalty consideration, he adds, one must ask "how much damage does a taxpayer suffer who gets the wrong answer?"
The IRS doesn't know and can't figure out how many such errors lead to penalties for the taxpayer, but it must be very few. "Under what fact scenario could someone call, get a wrong answer and get a penalty?" asks Keith. Someone might be encouraged to take an unpermissible deduction, but they'd get a notice, says Keith, that "you can't deduct funeral expenses for your pet Shih Tzu: pay up, plus interest." Penalties, says Rob Giannangeli, IRS spokesman for the Los Angeles district, "are only assessed for failure to pay after you get a specific bill."
There are penalties for making a "substantial understatement" of one's tax liability, but it's not a common situation, or a common telephone inquiry, since "substantial" means more than 10 percent of the correct liability, or $5,000, whichever is greater. There are also penalties for failing to file any return at all, but if the taxpayer is penalized for failing to file, says Keith, he can explain that an assistor told him he wasn't required to file, and request a penalty "abatement."
Alas, no one knows how many requests for penalty waivers grow out of this situation, or any other, for that matter. Such requests are made locally and at any point in the process - correspondence, audit, collection - and may be quietly granted at any point.
In fact, and IRS reassurances aside, it's no sure thing that such waivers would be granted, given the number of people who would probably claim that "an assistor made me do it." Indeed, the IRS has never defined how a taxpayer proves that IRS assistance, verbal and undocumented, caused his error. One can only, says Keith, note "the day called, the person's name, the question you asked and any citation given. That information will be used by the person who'll decide whether it's appropriate to abate the penalty."
One thing's for sure: The IRS's promise last year that it might also waive interest on payments in such situations has not been repeated. "We don't regard interest as punitive," says Keith. "It's a fee for the use of money."