Outgoing Internal Revenue Service Commissioner John Koskinen foresees problems with tax reform if major provisions apply to the current tax year, and predicted that the agency would need more funding from Congress to implement the legislation if it passes.
Koskinen is nearing the end of a four-year term next week, having survived attempts by some Republican lawmakers in Congress to have him impeached. He will be succeeded by David Kautter, the Assistant Secretary of the Treasury for Tax Policy, who will become acting commissioner on Nov. 13 (see Trump names Kautter as acting IRS commissioner).
During a press conference Monday, Koskinen reflected on the IRS’s accomplishments and challenges over the past four years, along with the prospects for tax reform. Although most of the provisions in the bill released last week by Republicans on the House Ways and Means Committee won't apply to current tax years, there are a few that would be retroactive. Nevertheless, Republicans are promising that taxpayers will be able to file their taxes on a postcard-size forms instead of the bulky tax returns they are used to printing.
“Tax reform will work a lot better for us if it’s made prospective, but we don’t obviously control that, and it will be up to the Congress as to how they want to proceed,” Koskinen said in answer to a question from Accounting Today. “We’ve been great proponents of simplifying the code. I keep telling people we don’t have a dog in the fight about the policy. We have a great interest in execution and implementation. But if you make major changes to what we call the core record layout, then that’s going to take resources, significantly more than we have. Our hope would be that if you’re going to make major changes and affect the system, which causes us to make major changes in information technology, that will come with a recognition that we can’t do it with the workforce we have now. We’ll need to get appropriate resources, particularly for our information technology systems.”
Tax Extenders Uncertainty
The IRS is still waiting to hear from Congress about the fate of dozens of so-called tax extenders, many of which would be eliminated under the House Republicans’ tax reform bill, even though Congress made many of them “permanent” only a few years ago. They include deductions for state and local income taxes and sales taxes, and for schoolteachers to write off the cost of school supplies they buy for their students.
Koskinen noted that he typically asks Congress each year for more assurances about the tax extenders. The IRS warned tax professionals last Friday that the tax extenders issue has not yet been resolved and therefore the start date for next year’s tax filing season has not yet been set (see IRS warns against false reports on filing season start date).
“First of all, every year for the last several years we’ve had a question about tax extenders, where you have a provision of a credit for one reason or another, and a number of them have been renewed annually at the end of the year,” he said. “Last year, a whole series of them were made permanent so we don’t have them this year, but there’s still -- depending on how you count them -- as many as 30 extenders where the Congress is going to be considering whether to extend them or not. And if you extend them, they’re extended for the tax year, which means they’re extended retroactively. So every year, I usually write to the tax writers reminding them of two principles. One is, the earlier we get legislation the easier it is obviously for us to absorb it. The second is, with regard to tax extenders, I’ve told them that even if they’re retroactive, if they’re not changed we can generally implement them without a significant delay. But if you change the way the extender operates, the calculation for the benefit gets adjusted. We then have to change the systems, and that’s where we run into trouble. So we’ve tried to alert the Hill this year again on the extenders, that if they’re going to extend and re-up the provisions, we can deal with that because basically what we do is we have an on/off switch. We’ve already programmed the system so that if you extend the extender, we’ve got the system set. If you decide not to, we’ve got the system set to run without it. But what the system can’t assume is some adjustment to that extender.”
Koskinen discussed how the IRS has managed to cope with major legislation during his term despite budget cuts and lack of funding for implementing new laws.
“One area in which we’ve been very successful is in implementing a whole series of legislative mandates, nearly all of which came without any additional funding from Congress,” he said. “It’s a long and complicated list that includes the Affordable Care Act, the Foreign Account Tax Compliance Act, better known as FATCA, the Private Debt Collection program, the ABLE Act, the PATH ACT, and the reauthorization of the Health Care Tax Credit. The ACA alone cost us over $1 billion in information technology expenses to establish the system without no appropriations. That was money that was desperately needed in other areas of our IT systems.”
Koskinen is worried that if the IRS budget is cut further at the hands of Congress, it could lead to a breakdown during tax season.
“My concern as I leave now is that if the IRS budget continues to be cut, tax administration will fail in one of two ways,” he said. “This is not a question of whether; it’s simply a question of when. The first significant risk involves the IRS information technology systems, which have long been operating with antiquated hardware and software. About 64 percent of our IT hardware systems are aged and out of warranty, and 22 percent of software products are two or more releases behind the industry standard. I’m concerned that the potential for a catastrophic systems failure is increasing as our infrastructure continues to age. If this failure were to occur during the filing season, we could be looking at a lengthy interruption in processing returns and issuing refunds. This could have a devastating effect on more than 100 million taxpayers waiting on their refunds, as well as the nation’s economy, which sees some $275 billion of refunds each winter and spring.”
Tax Compliance Worries
Koskinen is also concerned about the impact on tax compliance as the IRS’s enforcement budget is starved. “The second way the tax system is at significant risk is our ability to adequately ensure tax compliance,” he said. “We’ve lost about 20,000 full-time employees since 2010. Of those job losses, about 7,300 were key enforcement personnel, representing about a third of our compliance workforce.”
He pointed out that in 1954 the IRS had more than twice as many revenue officers as it has today, and the current number of Criminal Investigation special agents is the smallest it’s been since 1971.
“What these numbers mean is that without adequate resources, we don’t have enough people to perform all the audits we think are necessary,” said Koskinen. “That continues to show up in our enforcement statistics. We audited just under 935,000 individual income tax returns in fiscal year 2017. That’s the lowest number in 14 years. The number of investigations initiated by our Criminal Investigation division is down 11 percent from last year and is 36 percent below 2010. And the number of prosecutions recommended has declined by more than a third in the last four years.”
Koskinen worries that that may have an impact on the tax compliance rate and the tax gap. “If people think that many others are not paying their fair share or that they’re not going to get caught if they cheat, or they’re just frustrated because they can’t get the help they need from us to file their taxes, our voluntary compliance system will be put at risk,” he said. “A 1 percent drop in the compliance rate translates into a revenue loss of over $30 billion every year.”
He pointed out these are long-term problems that could grow worse if they aren’t addressed.
“Neither of the two problems I just mentioned can be turned around overnight,” said Koskinen. “If the funding situation isn’t corrected soon, and a major technology failure does occur at some point in the future, I don’t want anyone to say they weren’t warned or that the problem occurred because the IRS employees weren’t doing their jobs. Our workforce is as dedicated and talented as any I’ve ever worked with, and our employees continue to do everything they can for taxpayers, even within our constrained resources. But there’s a limit to what you can expect them to do, and when the system begins to fail because of lack of resources, it’s important for everybody to understand that’s the driving force.”
Mnuchin and Kautter
On the other hand, Koskinen believes Treasury Secretary Steven Mnuchin will push to get more funding for the IRS’s aging IT systems.
“The good news for us is that Treasury Secretary Mnuchin has been very supportive of the IRS from the start of his tenure,” said Koskinen. “He testified at his confirmation hearing about how surprised he was that we were underfunded, and how concerned he was about making sure our IT systems would continue to function properly. I’m hopeful that in the future, the IRS and Congress can have a more rational and reasonable discussion about the resources the agency needs to meet its very critical responsibilities.”
He is also hopeful about his successor, David Kautter, but admitted to some uneasiness about him fulfilling two roles by keeping his post as Assistant Treasury Secretary for Tax Policy at the same time as he works as acting commissioner.
“It will be a challenge,” said Koskinen. “Mr. Kautter is a very knowledgeable tax guy. We were delighted when he was appointed to be the Assistant Treasury Secretary for Tax Policy. But as has been noted by everybody, he’s keeping that job, so obviously for the rest of this year he’s going to be very busy on tax reform. To do that job and be the acting commissioner full time would obviously be impossible for anybody. But he’s been a quick study. We’ve met with him several times. He’s made it clear he wants to be supportive of everything we’re doing. He wants to be appropriately engaged, and so we’ll move forward.”
However, he still believes tax reform is going to be a major lift. “As I keep reminding people, the implementation of tax reform, in terms of the technology, the forms, the instructions, is all done by career IRS employees,” said Koskinen. “The new IRS commissioner, permanent or acting, isn’t going to make adjustments to the 1040, isn’t going to rewrite the instructions. The bulk of the work will go forward, almost no matter who’s the commissioner. I think the challenge with tax reform is more focused on the fact that it could be a significant redo of our information technology system, which even with time would take more resources than we now have. But nonetheless, if we have the resources, we have a history of willingly, happily implementing whatever tax policy changes and tax reform the Congress passes.”
Despite his clashes with some members of Congress, Koskinen still considers his term to have been a rewarding one.
“As I leave the IRS I want to say what an honor and a privilege it’s been to be the commissioner,” he said. “When they first asked me to take this job, it took me about 15 seconds to say yes, because I realized how important the agency is to the functioning of our government. I can honestly say that if I knew then what I know now, it would still only take me about 15 seconds to say yes.”
Progress on Fighting Identity Theft
He also discussed some of the major accomplishments of his time at the IRS. “Looking back over the last four years, I’m delighted with what the agency has accomplished in many areas, even with all of the constraints and challenges we have faced,” said Koskinen. “That progress is a result of a lot of important and good work by the career employees of the IRS. My job has just been to try and provide appropriate structure and support for the work we do.”
He noted that this past tax filing season was the smoothest one of his four-year tenure, and the IRS has made major strides in combating identity theft.
“We’ve made amazing progress over the last few years, thanks to the efforts of the Security Summit initiative, launched in March 2015, and the continuing important work in this area by our IRS employees,” said Koskinen. “Probably the most compelling evidence of the progress we’ve made so far with this unique partnership with the private sector tax community and tax commissioners across all states is the decline in the number of people reporting to the IRS that they were victims of identity theft. In 2016, the number of victim reports was 376,000, reflecting a drop of 46 percent from the prior year. This year through August, about 189,000 taxpayers filed victim reports, which was an additional drop of about 40 percent from the same period last year. Taken together, the number of taxpayers filing victim reports has fallen by about two-thirds in a little less than two years. That means we’ve helped prevent hundreds of thousands of taxpayers from becoming victims of tax-related identity theft.”
However, he noted that cybersecurity continues to be a challenge. “The organized criminals and syndicates we’re dealing with are creative, well-funded and persistent,” said Koskinen.
Improving Taxpayer Service
Koskinen believes the IRS has also made strides in improving taxpayer service. “Another area where the IRS has made progress over the last four years is improving the taxpayer experience over the longer term,” he said. “That includes taking the first concrete steps toward a fully functional online account for taxpayers. We now have features that let taxpayers view their IRS account balance and see payments posted online. They can also perform online transactions, such as paying their taxes or setting up an installment plan.”
The IRS has also been trying to reduce some of the long wait times on the phone and in person at its Taxpayer Assistance Centers.
“The IRS also recognizes there will always be taxpayers who want or need to talk with us on the phone or to visit us in person,” said Koskinen. “Even as we move to having 90 percent of taxpayers file online, that still leaves over 15 million returns filed on paper, and we will continue to serve those taxpayers as well. It’s also important to recognize that increasing online services frees up resources for us to improve services we provide to taxpayers who still want to deal with us on the phone or in person. In fact, one of our best accomplishments has been to get rid of the long lines that formed in the early morning at Taxpayer Assistance Centers around the country during filing season. We did this by allowing taxpayers to make an appointment at a specific time to visit a center. The lines disappeared, in part because half of the people who called for an appointment didn’t actually need to visit us in person.”