Internal Revenue Service Commissioner John Koskinen said with the help of freezes on hiring and overtime, his agency should be able to make it through fiscal 2015. But he said delivering on a promise to award performance pay to half of the IRS workforce and finding the money for a 1 percent pay raise for all its employees provide much-needed morale for the cash-strapped agency.

“We’ve now reached if not the breaking point, clearly the point where there is no easy was to cut any other expenses out of the agency,” Koskinen said in an interview on In Depth with Francis Rose.

To ease its struggle through fiscal 2015, the IRS is imposing a hiring and overtime freeze, as well as a decline in hiring temporary and seasonal employees. Koskinen said the freeze is the agency’s best chance at saving money, since 75 percent of the budget is spent on people. However, he said the agency can’t shoot itself in the foot with cuts that could jeopardize its critical operations.

“I’ve told our CFOs that as we’re working our way through this, we have to take the money that we could save with no overtime and no hiring and 10 or 15 percent of that we set it aside, because we know there are going to be situations where we need to hire people, where it makes no sense not to,” Koskinen said. “In the middle of filing season, if the filing system has a problem on a Friday afternoon we can’t say, ‘Well, we’re shut down for two days, because we can’t afford the overtime.’ So we will, in emergency circumstances, provide overtime where we need to and where it’s critical hire people to fill leadership slots or slots with important technological or other expertise that we need to operate.”

Koskinen said the IRS has run out of options for cuts. The agency has 13,000 fewer employees than it did in fiscal year 2010 and is working with a 10 percent reduction of that year’s budget. Over the last five years, he said the IRS has saved about $1 billion in efficiencies, but added that there’s no more fat to trim at the agency.

“We’re now down after five years in a row of budget cuts to a point where we have no choice but to cut back on taxpayer services and enforcement and the further development of our taxpayer technology,” Koskinen said.

Congress approved a $10.9 billion budget for the IRS in fiscal year 2015 — $1.2 billion short of what is was in 2010 — leaving a $346 million cut that the agency must absorb during the remaining nine months of the year. On top of that, Koskinen said the IRS must find the funds to honor a 1 percent pay raise mandated by the 2015 omnibus spending bill.

Koskinen said his employees deserve the pay raise, but warned that finding $600 million in the agency’s FY 2015 budget will hit the agency harder than most.

“We’re the only major agency at a post-sequester level to begin with, now $600 million below it. So for most agencies that have have been at level funding or even had a modest increase, the 1 percent is an absorbable number. But when you’ve been cut as far as we have, the 1 percent, which we’re delighted to have for our employees, does mean that we have an even deeper hole to dig out of,” he said.

At the end of the day, Koskinen said the math is unworkable, and that the agency simply doesn’t have enough dollars to fulfill the mission of the agency. He said the strain on taxpayer services will be most noticeable with its call service. Last year, the IRS had a level of service of about 60 percent — meaning 40 percent of callers failed to get through to a live operator.

“With this cut, we have no choice but to end up with a level of service, over the full year, in the range of 50 percent, which means half of the people calling aren’t going to get a hold of a live person, and we just think that’s a miserable level of service,” Koskinen said.

Despite some successes, like the “Where’s My Refund?” app, Koskinen said the IRS’ overall IT systems are in need of an upgrade.

“We’re still driving what I call an updated Model T — with a great GPS system, a wonderful sound system and a rebuilt engine, but it still looks an awful lot like a Model T,” Koskinen said. “We can’t provide, as a result, the full range of online services that they deserve.”

One thing Koskinen won’t cut, however, is the performance pay that was promised to half of the IRS workforce.

“We have to provide them the support they need and I’ve already been on the record as saying that we will pay the performance awards to the 55 percent of employees that earned them, and if people are eligible for promotions or increases, we need to support them. We have to invest in the workforce, otherwise over time the agency will lose its ability to perform.”

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