The newly named acting commissioner of the IRS, along with two former holders of the position, outlined the agency’s immediate goals following the authorization of $80 billion in additional funding, as well as guiding principles it should maintain moving forward.
Just days after the interim replacement for outgoing IRS Commissioner Chuck Rettig was announced, now acting Commissioner Douglas O’Donnell addressed an audience of tax practitioners and government officials. Speaking November 1 at a hybrid tax conference co-hosted by the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) in Washington, D.C., O’Donnell provided the first major update on how the IRS has been acting on its 10-year appropriation from the Inflation Reduction Act (PL 117-169).
“Simply put, the approximately $80 billion will enable us to broaden our horizons in terms of what we are and what we can do to enhance the experience for taxpayers, tax pros, [and], frankly, everyone that interacts with the system,” he said in his opening remarks. “We will use these resources wisely and efficiently to achieve the improvements that we all know that we need.”
To help facilitate what O’Donnell described as broad “transformation efforts,” a new central office within the IRS has been established. According to the new interim commissioner, this office will coordinate the implementation of the inflation bill’s myriad provisions with various divisions, information technology staff, and the Human Capital Office. Such cross-departmental collaboration has already been instrumental in the beginning months since the legislation’s enactment. According to O’Donnell, the IRS aims to have prepared a strategic operating plan, as required by Treasury Secretary Janet Yellen.
O’Donnell said that right now, hiring is a major priority, especially ahead of the upcoming tax filing season. New hires will consist of IT experts, data scientists, and compliance enforcement agents. He made a point to specifically refute the notion that the agency will double its roster of auditors overnight.
“It is not possible to double the workforce in any component of our organization that has any size. It’s just not going to happen,” said O’Donnell. He later rebuffed “wild inaccuracies” surrounding messaging from some lawmakers that the funding will be used to unleash “an army of armed agents to audit and harass taxpayers.” O’Donnell, echoing his predecessor, emphasized that low-and middle-income families and small businesses will not be the subject of heightened scrutiny, citing Yellen’s directive that audit rates will not rise above historic norms for taxpayers making under $400,000 per year.
According to O’Donnell, the IRS currently employees 38,000 fewer workers than in 1992 when the population of the U.S. was 30% smaller. He noted that the modern tax code is substantially more complex, especially surrounding cross-boarder activity. Alongside bringing on new staff, a simultaneous goal should also be to retain the existing workforce, he continued, as the agency has an annual attrition rate of 8,000 people, largely due to retirement.
Speaking to the outstanding backlog of unprocessed paper returns, O’Donnell reaffirmed that the goal is still to clear the current inventory by the end of this calendar year. To prevent future delays, he said the IRS is prioritizing a shift toward digital. This includes scannable returns to expedite processing, more forms that can be filed electronically, and online taxpayer correspondence.
“We have a great deal of work ahead of us, but I know that the IRS employees and leaders are up to the task,” O’Donnell closed. “We have already begun to set our sights super high. We got the $80 billion. There is an expectation that we deliver and it is a heavy responsibility, one that we are taking very seriously.
However, former IRS Commissioner Charles Rossotti, who served in the role from 1997-2002 under presidents Bill Clinton and George W. Bush, said that in the grand scheme of things, $80 billion over a decade is not a substantial amount.
“I’ve calculated that after 10 years of this money, rebuilding the IRS in terms of sheer size, it will only be about three fourths of the size in relation to the economy that it was when I was [at the IRS] and we were not really adequately funded at that time,” said Rossotti at the October 31 kickoff of the same AICPA/CIMA conference.
According to the former commissioner, who is now a senior advisor at global investment firm Carlyle, more money alone will not be a cure-all for the IRS’ operational and technological woes. He said that “doing more of everything” that the agency has been doing up to this point is not enough. “Instead, the IRS is going to have to be better, not just bigger.”
To do so, Rossotti laid out several keys to long-term success at the IRS once a permanent commissioner is confirmed. The common denominator across all of them is the advancement of technologies to uplift the agency into the 21st century. Investing in new digital capabilities, especially data analytic models, will streamline and make more efficient customer service and compliance.
“And with respect to compliance, the critical point is that the goal is compliance,” he said. “Enforcement is a tool to achieve compliance. Enforcement by itself is not a goal.”
Exemplifying this, Rossotti explained that simply boosting audit numbers would do little to reduce the so-called tax gap. Instead, audit performance should be measured in “meaningful ways,” he said. “When you get to measuring it’s necessary to be sure that you’re looking at the results, not just the inputs. Just doing more auditing … is not a meaningful goal.”
Another previous head of the IRS, Fred Goldberg, agreed that the tax gap cannot be bludgeoned down using just more audits alone. Goldberg, who was commissioner from 1989 until 1992, stressed that “the proper metrics should focus on quality, efficiency, and improved compliance through a combination of training and improved return selection driven by technology-based data, [and] research and analytics.”
Appealing to practitioners directly, Goldberg urged the tax community to hold the IRS and lawmakers accountable, calling now a “unique time in the history of our tax system.” He said that the funding comes at a time when the resource strain at the IRS has hit a boiling point, a chance the agency must not squander.
“Failure is not an option,” said Goldberg. “This is the last shot.”
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