As the tax community digests the IRS’ Strategic Operating Plan detailing its vision for spending the 10-year, $80 billion appropriation from the Inflation Reduction Act, attention should be given to plans for boosting technologies and incorporating data analytical tools, experts say.
Speaking at an online event hosted by the Tax Policy Center April 17, Former IRS Commissioner Charles Rossotti said while the spending plan’s goals and general direction are “outstanding,” the agency should revisit the “under-allocation” of funds directed towards new and improved tech. Currently, the IRS intends to spend $4.8 billion of the $80 billion through 2032 on modernization.
Rossotti, who served as commissioner from 1997-2002, said the IRS meeting its goals is dependent on using technology to “improve the way the Service works,” and not just an influx of cash. Citing President Eisenhower, he said that while planning is essential to the process, plans are “for the most part worthless” if not revised based on gained experience.
“Bottom line: it’s a very strong statement of direction,” said Rossotti of the plan. “It identifies very well-thought-out actions—especially the service goals. But many details are going to have to be worked out, and I think the funding allocation is going to have to be revised in some fairly significant ways.”
The IRS’ short-term goals for improving customer service through technologies should be commended, but the plan’s portion on enforcement—or “compliance,” as Rossotti prefers—is largely “vague.” Until the compliance strategy is more fleshed out, he recommended that the IRS “slow down” on hiring revenue agents. The reason, the former agency chief explained, is that without arming staff with the proper tools to effectively perform their jobs, there will be “a lot of unproductive audits, and that’s not going to be useful.”
It would be rudimentary to use a model that predicts how many taxes will be recouped per new revenue agent based only dollars spent, according to Rossotti. In other words, closing the tax gap cannot be accomplished sheerly through “flooding the zone” with more staff—data analytics and machine learning capabilities should be expanded alongside gradual hiring, Rossotti concluded.
Rochelle Hodes, a principal in Crowe LLP’s National Tax Office in Washington, told Checkpoint in an interview that the IRS’ hiring efforts are “admirable,” but it will take much longer than expected for a sufficient amount of new examiners to be fully onboarded and trained. Based on her experience, requests for extensions of the period of limitations on assessments have been filed earlier because “the exams are taking along time, there’s not enough staff … or the processes for the new examination are so new, personnel don’t expect their internal procedures to slow down the process.”
Hodes said it is “going to be a few bumpy years” for the IRS to streamline its new workflows to target abusive transactions, partnerships and passthroughs, and large corporations. Despite the $400,000 threshold set by Treasury for where the bulk of the new enforcement activity should focus, Hodes advised taxpayers to get in the habit of prudent recordkeeping in preparation of a potential audit. What the IRS considers “historical levels” for pre-2012 audit rates remains unclear.
“If somebody hasn’t been audited in a long time, they should plan on being audited,” which applies to both businesses and individual taxpayers, she said. The plan indicates that the IRS wants to correct real-time errors using online notices and collect expeditiously. Still, although “everybody is going to get touched with theses increased enforcement levels,” big earners will be the most impacted, Hodes expects. Low-income taxpayers, especially those claiming the earned income tax credit, may be a group under the $400,000 threshold that could face a potentially disproportionate amount of scrutiny since those audits are “less labor-intensive,” said Hodes.
Deputy Treasury Secretary Wally Adeyemo confirmed as much at a TPC panel during Monday’s event. According to Adeyemo, it takes on average five hours to conduct an audit of someone making under $400,000 versus. 250 hours “to just start to do” an audit of those in the top 1%.
Data analytics and artificial intelligence advancements can cut into those long audit times, the IRS hopes, but Miller & Chevalier Member Rob Kovacev told Checkpoint that the agency should be wary of the “Black Box Effect.” That is, the IRS should not be so over-reliant on algorithms that there is not enough human oversight of newly developed tools. Revenue agents should always be able to check a computer’s work.
“The question is: What degree of human intervention is going to be involved?” said Kovacev, adding that machines do not “have to explain” themselves. “You don’t know how it came up with the list of people it’s telling you to go audit.” He said that it is “not always easy” to work backwards on the audit trail to figure out how the computer got there. The payoff of using these technologies, however, is they are “actually relatively cheap,” Kovacev said. An AI algorithm can scan thousands of corporate returns, for example, and isolate patterns and anomalies in milliseconds. Further, universal tax returns for corporations in certain industries can be implemented to more easily determine tax credit eligibility using machine learning.
This goes in hand with the idea of centralization, which Kovacev assesses is the “driving theme” of the Strategic Operating Plan. The use of data analytics will come from the middle. “What you’re going to see is increased control from Washington,” he explained, referring to how revenue agents go about making decisions and how to conduct, for instance document requests. Transfer pricing and research credit audits have already become more centralized in this way, “but this will accelerate the trend.”
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