IRS centers established to help people prepare their tax returns gave incorrect answers - or no answer at all - to 43 percent of the questions asked by Treasury Department investigators posing as taxpayers.
The investigators concluded that half a million taxpayers may have been given wrong information between July and December 2002.
Service varied widely by state, with some of the best in the Northeast and some of the worst in the Midwest and Plains.
Auditors were given correct answers to 57 percent of their tax law questions during the course of the study. Less than half, or 45 percent, of the questions were answered correctly and completely. In 12 percent of the cases, the answer was correct but incomplete.
Internal Revenue Service employees gave wrong answers to 28 percent of the questions. Twelve percent went unanswered, as taxpayers were told to do their own research in IRS publications. In 3 percent of the attempts to get questions answered, the auditor could not get any service at the center.
The IRS disputed the results. Using the raw numbers gathered by Treasury investigators, the IRS recalculated the error rate and ignored any instance when a taxpayer was denied service or told to do his own research. Of the questions answered, they calculated that 67 percent were answered accurately.
"We recognize that an accuracy rate of 67 percent for tax law service is inadequate," Henry O. Lamar, the IRS commissioner overseeing individual tax returns, wrote to the investigators.
The auditors said they had a better chance of getting a correct answer when IRS employees walked them through relevant material and asked probing questions.
The questions most commonly answered incorrectly dealt with the earned income tax credit, education credit and dependents.
"The IRS' failing grade here is unacceptable," said Senate Finance Committee Chairman Charles Grassley, R-Iowa. "It's especially discouraging that the IRS is often getting wrong basic answers to questions about the EITC and the child credit, which benefit low-income taxpayers."
In a sign of improvement, Treasury investigators went back undercover for two months during the height of this year's tax-filing season and found the number of incorrect answers dropped slightly. The auditors got incorrect answers to 25 percent of their questions.
The number of correct answers went up to more than 70 percent, as employees at the taxpayer assistance centers stopped instructing taxpayers to find IRS publications and do their own research. The IRS banned the practice in January.
The Treasury Department's inspector general started investigating the error rate at the nation's 400 taxpayer assistance centers when a 2001 study showed that auditors making anonymous visits got incorrect or insufficient answers to 73 percent of their tax law questions.
Since then, the IRS has increased training on topics that elicit the most questions and the most incorrect answers. The agency has also given employees more time to brush up on tax law topics during the day. Employees must pass certification tests before answering taxpayers' questions on certain topics.
The slow improvement shows "it will take time before the impact of additional training and managerial oversight will be reflected in the accuracy rates," Treasury investigators concluded.
The IRS hopes to improve its track record and answer 80 percent of the questions correctly this year, and 85 percent correctly next year.
By Mary Dalrymple