Effort to Revamp I.R.S. Struggles Despite Multibillion-Dollar Infusion

A multibillion-dollar federal effort to modernize the Internal Revenue Service has not yet solved the agency’s struggles to answer customers’ calls, ameliorate identity theft or process amended tax returns, the agency’s watchdog wrote on Wednesday in a report to Congress.

The annual report by the Office of the National Taxpayer Advocate comes as the agency faces a steep cut to the new funding that was intended to help it resolve longstanding issues, including backlogs of tax returns and lackluster customer service.

A spending agreement in Congress to fund the federal government would claw back about $20 billion of the $80 billion the I.R.S. received from the Inflation Reduction Act of 2022. Republican lawmakers are eager to rescind even more money from the agency, even as it tries to focus its energy on improving customer service and responsiveness to taxpayers.

Despite the persistent challenges, the national taxpayer advocate, Erin M. Collins, praised the I.R.S. for eliminating most of its backlog of unprocessed tax returns and improving its responsiveness.

“Overall, the magnitude of successes exceeded the areas of weakness in 2023, and most metrics showed significant improvement from the depths of the pandemic,” Ms. Collins said in a statement.

The report, which lays out 10 areas in which the I.R.S. needs to improve, described efforts to be more accessible as a “marathon” and said the agency had not been as successful on that front as its officials had suggested.

Although the I.R.S. had said its telephone wait times had fallen and that it was answering 85 percent of its calls during the 2023 tax filing season, the report said those numbers were misleading. The watchdog said that the “level of service” metric that the I.R.S. used excluded many of the calls made to the agency and that for the full 2023 fiscal year it had answered only 29 percent of the calls it received.

The report also pointed to problems in how the I.R.S. deploys its staff, saying that it was not being done efficiently. Customer service representatives were often working when call volumes were low. As a result, agents were often “simply sitting around waiting for the phone to ring” despite the fact that callers regularly could not reach anyone during busy periods, the report said.

“The I.R.S. cannot easily shuffle employees back and forth between answering phones and processing correspondence, so unproductive employee time was the price it had to pay to improve telephone service levels,” Ms. Collins said.

The challenges could be more difficult to address if Republicans succeed in further rescinding the agency’s funding.

The Biden administration has argued that a robust tax collection agency is crucial for narrowing the “tax gap,” or government revenue that goes uncollected. The Treasury Department estimates that shortfall to be more than $600 billion a year and has warned that starving the I.R.S. of resources is harmful to taxpayers.

“I would not want to endanger those efforts,” Treasury Secretary Janet L. Yellen told reporters on Monday, referring to the agency’s modernization plans, but she expressed optimism that even if some of the funds were taken away, efforts to revamp the I.R.S. would still proceed.

“In the short run, certainly the medium run,” she said, “the I.R.S. would be able to continue its important work in modernizing our tax system.”