As Republicans and Democrats fight it out on the Hill over tax extenders, Internal Revenue Service (IRS) Commissioner John Koskinen doesn’t care to take sides. It doesn’t matter, he told me, how Congress resolves the issue, so long as they resolve it. The IRS is, he says, “agnostic” about the specifics, reminding taxpayers that:
Our job is in tax administration, we’re not the tax policy people.
That tax administration job has become a lot more difficult over the past year. With spending cuts already taking a toll on taxpayer services, the agency is bracing itself for another tough season. In fact, Koskinen cites funding the IRS as his biggest challenge since taking office last December.
“It’s a serious problem for us,” he says. “I don’t know who got our $500 million but I’ll bet they’re not gonna give you back the $2-3 billion we would have if we had it.”
The IRS has continued to bring in dollars even though funding is down and new challenges are up. Over the past four years, the IRS has made cuts to personnel in an effort to make up for a whopping $850 million in cuts. That means, for example, that the agency has 13,000 fewer employees to deal with 7 million more taxpayers – and to tackle the statutory mandates of implementing the Affordable Care Act (ACA, or sometimes called Obamacare) and the Foreign Account Tax Compliance Act (FATCA). The agency is, the Commissioner notes, being asked to do “more and more with less and less” which he says is doable for a while “and then you run into a wall.”
The IRS is largely made up of people and technology. Cuts mean that one or both will be affected. The Commissioner says that, so far, they’ve tried to lessen the impact on taxpayers but that the concern continues to be the level of taxpayer services. In particular, taxpayer services on the phones have been dramatically affected: last year, 3 out of 10 taxpayers couldn’t get through to the IRS on the phones. That looks to be worse for the 2015 filing season with answer rates expected to dip as low as 53% – and that’s after an average of 34 minutes of wait time.
To combat the problem, the IRS is trying to move taxpayers onto the web. The agency has already improved its online services to include transcript requests, installment agreements, and refund updates; those services would have been done over the phone or in-person in prior years. The Commissioner would like to expand the availability and scope of online services but “obviously it takes funding.”
The Commissioner has been in conversations with those on the Hill, trying, he says, to “articulate our vision of what the IRS experience ought to look like three to five years out.”
And what it should look like isn’t cutting edge. Rather, the Commissioner says, he wants to see the IRS services brought up to the level of a Bank of America or Wells Fargo. He’s not looking for fancy. But, he says, “Sometime in the near-term future, people ought to be able to deal with us like they do with their financial institutions.” He envisions a system where taxpayers can log into their accounts online, check out posted information and make additions or corrections immediately – without waiting on the phones, IRS office appointments or (gasp) the postal system.
The IRS sends out more than 200 million notices every year. 200 million. The cost of postage alone is horrendous.
The time delay is even worse. Correspondence season for the IRS starts in summer. That’s the term that tax practitioners give to the time period after filing season ends when IRS starts examining returns and sending out notices regarding errors and questions. By that time, taxpayers have often forgotten what was on the return. They may not have their records handy. The lapse in time from filing to resolution can be dramatic.
But what if, the Commissioner queried, the IRS could just post a note in your account online? It might be something as easy to fix a forgotten form 1099 (it happens all of the time). If your account was available online, you could agree or disagree fairly immediately – and perhaps even file an amended return on the spot. The potential for processing and correcting taxpayer information quickly could result in less frustration from taxpayers and less expense for the agency.
And what if tax practitioners could respond to IRS almost immediately on behalf of their clients? Increased services for practitioners would save agency dollars – and taxpayer dollars.
Making the agency more efficient and allowing taxpayers to address problems early in the process would be a win for everyone. Increased taxpayer compliance, the Commissioner notes, is a primary goal of the agency. “This image that we just love banging on doors and assigning penalties,” he says, “it’s not us.”
A system like that isn’t cheap. And there are additional challenges. In particular, the agency has a responsibility to protect taxpayer information but it’s clear from other sites that it can be done: banks and financial institutions do it all of the time. There’s “no reason,” according to the Commissioner, that “we shouldn’t be able to do that.”
But to make it happen, the IRS would have to improve their existing technology significantly. The Commissioner likened the existing tech system to driving a Model T, saying it has a “great GPS system and a wonderful sound system… We rebuilt the engine but it’s still a Model T.”
How old are these systems? The Commissioner says that the IRS is still using systems that were in place when John F. Kennedy was President. In fact, many of the tech gurus around today don’t know how to use some of the programming languages (like Cobol) that IRS still uses: they are nearly 50 years old.
But the IRS is getting money, right? We’ve seen the line items. Can’t that money simply be redirected to tech? Not so fast. Those funds aren’t earmarked to improve the existing systems. They’re targeted to Congressional mandates for new programs like ACA and FATCA. In 2014, for example, Congress gave IRS $430 million to implement ACA: $300 million of that was specifically directed to tech but only for ACA. Other funds were directed towards compliance for FATCA. Not for tax filing season. Not for taxpayer customer service. There has been no increase in the tech budget for IRS systems not tied to ACA or FATCA. IRS expects the same for 2015.
The Commissioner agrees that the IRS can’t just ask for a pot of money. That’s why, he says, that the agency has been clear about what the funds would be used for and why they need ongoing funding for operation and maintenance costs (it doesn’t make sense to fund a project if you can’t run it).
And yes, the agency could be more efficient. According to the Commissioner, the agency has made cuts. They’ve cut travel. They’ve cut training. They’ve cut support. They’ve cut office space. They’ve cut printing (no more printed instructions). They’ve cut postage (no more tax forms in your mailbox).
But the cost of putting on filing season is still significant: nearly $400-500 million. Most of those dollars are in programming and customer service.
Last year, filing season went pretty well. The face to the public looked pretty good (some refund concerns notwithstanding). But that level of service can’t continue with existing numbers. The Commissioner says that “we’re our own worst enemies in pretending that we can keep doing this because what we’re doing is hollowing out the agency… but the system will collapse.”
It already looks pretty grim for 2015. While saying that IRS employees still have an “amazing level of dedication” and a “reasonable amount of energy,” the Commissioner says there is the sense that if 2015 budget gets cut further, and if 2016 is the same, “people will begin to think there’s no end to this, there’s no light at the end of the tunnel.”
The agency is already down 3,000 employees last year. Another 2,000-3,000 are on their way out by the end of this year.
The current rate of replacement is one new employee for every five employees who leave. It’s a series of blows to what the Commissioner calls the “best workforce I’ve ever been associated with in all of my wanderings through troubled agencies.”
As of yet, the IRS isn’t sure what kind of dollars they’ll see in 2015. The Congress and the President haven’t been able to agree. The Senate would give the agency $250 million above the numbers from 2014: $225 million of that is already earmarked in cost-of-living pay and retirement benefits that can’t be adjusted. The House would give them more. But, it’s not unlikely that Congress could switch gears and offer nothing, as they did last year, forcing the IRS to absorb those internal increases and make more cuts.
What gets cut next? The Commissioner is clear that it will be more personnel. That is, he noted, all that’s left.
That result, warns Nina Olson, the National Taxpayer Advocate, “bodes poorly for compliance.” That doesn’t mean that she thinks it’s the wrong answer. There are, she concedes, “no good choices” with the budget that’s being touted.
That can’t make IRS employees feel good. And it’s worrying for the upcoming filing season. Preliminary estimates are that employees will only be able to answer 53% of calls made to the agency: that assumes just 5-6 million new calls. With ACA and FATCA in play, some expect that number will go as high as 11 million. To address the spike, the agency plans to continue to put all of its resources into filing season and hope for the best. Realistically, however, that means that the 53% average answer rate could go even lower in the offseason.
What does that mean for taxpayers? The Commissioner offered a weak smile, then said, “Don’t call us after April 15.”
(Author’s Note: This is part two of my conversations with the IRS Commissioner and the National Taxpayer Advocate. You can read the first part of the conversation here. For more information about challenges for the upcoming season, including identity theft, the future of tax professionals and compliance/enforcement, continue to follow the conversation.)