No furloughs, but IRS faces hard road ahead

The IRS has stretched its budget enough to render furloughs unnecessary, Commissioner John Koskinen told Wednesday members of the House Appropriations Committee.

The IRS has made other tough choices, including freezing all hiring and overtime. This week, the agency decided that those would be enough to take the threat of a shutdown off the table, despite having $346 million less in its budget than last year. Koskinen had told employees in January to prepare for two days of unpaid leave as a last resort.

“We are pleased that we were able to avoid this scenario-and the resulting disruptions for taxpayers, the tax community and IRS employees,” Koskinen wrote in a letter to employees this week.

“Even though we’ve had to do less with less, so far filing season has been running about as smoothly as we could hope,” he added. “Through March 13, the IRS has already processed more than 72 million individual returns. At the same time, you and your colleagues have been able to maintain critical IT systems and focus on key enforcement efforts.”

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IRS Commissioner John Koskinen responds to questions from members of the House Appropriations Committee.

The news bore only the briefest mention in a two-hour hearing that was polite yet terse, as the commissioner answered pointed questions from the GOP members who had been responsible for slashing the agency’s budget. The IRS is asking for an 18-percent hike in its budget for a total of $12.9 billion, an increase that committee Republicans described as “massive” and “astronomical.”

The sum would help the agency bounce back from multiple years of cuts, Koskinen said. Sequestration dealt the first blow to the IRS, like other agencies. But more recently, Congress voted to shrink the IRS budget in response to its alleged targeting of conservative groups that applied for tax-exempt status. As a result, the agency has lost more than 13,000 full-time employees since 2010. At the same time, it is receiving more requests for help, largely because of new reporting requirements under the Affordable Care Act.

The agency expects to help fewer taxpayers and audit fewer tax returns this year, decreasing the likelihood of catching fraudsters who file false returns. The immediate impact, however, is far better than the long-term harm that could occur if the trend continues, Koskinen said.

“The combined impact of lower enforcement and lower taxpayer services isn’t just whether we’ll collect more or less,” he said. “At some point, we’re going to put at risk the entire compliance system and that’s not an on-off switch. Once people get the idea that the system isn’t working very well and they can take their chances, you can’t turn that around overnight.”

While Democrats appeared sympathetic, Republicans said they did not believe the agency had made the most of its limited resources.

“Instead of asking for the money that’s been taken away from you, I’d hope that you would study your budget line by line, prioritize your activities and reengineer your business processes to deliver these priorities,” said Rep. Ander Crenshaw (R-Fla.). “This is your opportunity to show this committee and all Americans that it’s no longer business as usual at the IRS.”

Nothing in the IRS’ current budget mandated cuts to customer service, he said.

Koskinen said that user fees, which the agency typically spends on call centers and other taxpayer services, had gone this year to technology upgrades because of legal mandates, including those under the Affordable Care Act.

“We asked for $300 million and we got zero,” Koskinen said. “So in effect, taxpayer services have $100 million less.”

Lawmakers also lambasted the high rate of mistaken payments, which House Appropriations Chairman Hal Rogers (R-Ky.) likened to an open sieve.

“People who don’t qualify for assistance are gaining lots of money for doing nothing but lying,” he said.

The agency is doing a better job of catching identity theft because of a sophisticated set of filters, but improper payments under the Earned Income Tax Credit program for low- and middle-income families remain stubbornly high, Koskinen said. The IRS projects it will spend more than $14 billion on mispayments under the EITC this year.

Three things would help, he added. The IRS now receives taxpayers’ W-2 forms by the end of March but the agency could prevent a large number of inaccuracies if it received the W-2’s in January, before most taxpayers have filed their returns. It also needs “correctable error authority,” he said. That would let the IRS change obvious mistakes on returns and send them back to taxpayers, rather than launching full audits, which are more expensive. He also advocated for the right to require tax preparers to have a minimum level of training to deter cheats.

“It takes more qualifications to cut your hair than prepare your taxes,” Koskinen said.

But all of those changes would require action by Congress, which members of the committee seemed unwilling to support. The IRS could sit on taxpayer refunds until after it had received and checked the W-2’s, Koskinen said, but that might upset a public conditioned to expect refunds within days, not months, of filing returns.

Moving beyond the battle over tax-exempt status

Confronted with lawmakers’ lingering questions over its tax-exempt group, Koskinen tried to show that the agency had made substantial progress in the three years since the controversy erupted. The administration has replaced all leaders involved, he said. The agency has processed the backlog of groups that applied for the status under the condition that they were not primarily involved in political activity. A handful of applicants remain because they have chosen litigation, he said.

Furthermore, he noted that just 900 of the IRS’ 87,000 employees worked in the tax-exempt group.

Yet Koskinen declined to say when the IRS would release new regulations to clarify how the group makes a determination about applicants.

“Our goal is not to do anything that looks like we’re trying to impact the next election,” he said.

Koskinen admitted that he had hoped the IRS would have made more progress by now, but he was more concerned about striking the right balance.

“Any regulation needs to be fair to everybody, clear and easy to administer,” he said.

A previous draft of the rule received 160,000 comments. The IRS is reviewing all of them. Koskinen said he personally had read about 1,200 pages of comments on both sides of the issue.

Koskinen, a turnaround expert who has led private and public organizations including Freddie Mac, also took a moment to compliment his employees, calling them the best workforce he had ever worked with.

“It’s a dedicated group of people who take the mission seriously, particularly the mission of helping taxpayers,” he said.

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