John Koskinen is using the last round of budget hearings in his term as Internal Revenue Service commissioner to warn lawmakers that money won’t buy a solution to all of the tax agency’s woes.
Koskinen testified at a July 26 Senate Financial Services and General Government Subcommittee hearing on the IRS’ proposed funding plan for fiscal 2018. President Donald Trump proposed a $10.975 billion budget, a cut of $260 million from the agency’s 2017 budget.
“We’re $900 million below where we were in 2010. If you gave us $900 million more today, I would say we probably can’t spend it effectively,” Koskinen said. “Our goal is not to try to solve this problem in one fell swoop, but you can’t keep eroding the funding and expect us to somehow magically out of whole cloth, to keep up.”
The IRS commissioner said to maintain current performance levels — including a 79 percent level of phone service during the most recent tax filing season — the agency would need $220 million above fiscal 2017 numbers, or $11.235 billion.
“We’ve squeezed all the efficiency out of the system we can, and we’ll continue to try to do it, but one of my points I’m trying to make as I leave as the commissioner is this is a critical issue,” Koskinen said.
Speaking to reporters after the hearing , Koskinen said his biggest concern is not with the $50 billion — $55 billion collected by the IRS through enforcement activities, but rather the $3.3 trillion collected every year from people who pay their taxes because they think the system is fair.
“If they begin to think the system is not fair, that people, rich or otherwise, are not paying their fair share, it’s corrosive to tax compliance,” Koskinen said. “If you have a 1 percent decline in compliance rate, it costs you $33 billion a year. If you take the revenue arm of the organization and ultimately undermine its effectiveness, you’re affecting, in fact, the ability of the government to finance its operations.”
Koskinen told reporters up to $8 billion per year is left uncollected each year, thanks in large part to a decline in the agency’s audit rate from 1.2 percent to 0.5 percent. According to numbers provided by the Treasury Inspector General for Tax Administration, IRS received $4.8 million for enforcement in 2017, while the 2018 budget proposed $4.7 million.
“That means that at 1.2 percent we were auditing returns that had errors in them, that in fact needed to be corrected or amended or we needed to chase those people further,” Koskinen said. “When you audit fewer people there are in effect returns out there not paying the correct amount.”
To help with enforcement efforts, IRS is contracting with four firms to collect on overdue tax accounts. The accounts taken up by the private collection agencies (PCAs) are chosen through several criteria including age and lack of resources preventing the agency from following up on the tax debt.
TIGTA Inspector General J. Russell George said his office is planning a September release of an audit report on the private debt collection.
That enforcement fairness Koskinen referred to also extends to having confidence that the agency is available to answer questions and provide information to taxpayers.
One of the results of continued funding reductions is a loss of workforce personnel. Koskinen said IRS expects to lose another 3,000 employees this year. The IRS would need to hire back 18,000 people to get back to 2010 numbers, but the agency could restore its 1.2 percent audit rate with an additional 3,000 to 4,000 people to help “provide the level of service we want” year round, and monitor IT systems.
One of the reasons the agency is surviving with a smaller workforce is through shifting more taxpayer services online. Koskinen said the 300 million hits to the Where’s My Refund? site mean even if that’s 30 million taxpayers clicking a button 10 times, those queries would have originally been phone calls, and appointments at taxpayer assistance centers.
Shifting those calls and in-person visits online means phone lines and assistance centers are more free to help people who don’t have internet access, or require in-person assistance to help with their tax filing and questions — which is a concern of both IRS watchdogs and members of Congress.
“In rural America, rural West Virginia, sometimes broadband is not what it could be and should be, and people are unfamiliar or uncomfortable [with online options],” said Sen. Joe Manchin (D-W.V.). “I appreciate you all are understanding the importance of us receiving the mail and working through the traditional lines of communication.”
Fellow West Virginia Sen. Shelley Capito, a Republican, also voiced her desire for putting “a plug in for that person-to-person assistance still being a very vital part of taxpayer services.”
In her mid-year report to Congress released in early July, National Taxpayer Advocate Nina Olson said IRS needs to change its focus to taxpayer service, outreach and education first.
“It must revise its mission statement back to an emphasis on taxpayer service and add a focus on taxpayer rights,” Olson said. “It must reinstate a geographic presence for its audit, collection and appeals functions as well as expand outreach and education. It must pick up the phone and talk with taxpayers, and listen to them when they speak.”
Risks of an antiquated system
Koskinen clarified during his time before the subcommittee that IRS would be pursuing Streamlined Critical Pay (SCP) authority to get technology experts hired and onboarded at the agency faster than it normally takes to hire within the federal government.
SCP is different than the general federal governmentwide Critical Position Pay Authority (CPPA), which the Treasury Inspector General for Tax Administration (TIGTA) recommended the IRS pursue in a July 24 report, while the agency also seeks the streamlined authority from Congress.
Koskinen said CPPA is “the opposite of streamlined,” because it requires approval from the Treasury Department, the Office of Personnel Management and the Office of Management and Budget.
“We had streamlined critical pay renewed every four years until 2013, it was then not renewed,” Koskinen said. “The president’s budget now proposes that it be reinstated. Thus far I think we have good support for it, but it is a decision that Congress has to make. Historically it was 40 positions, we never used all 40, but the vast majority are for technology people.”
Technology is also a priority for Treasury Secretary Steve Mnuchin, who also testified July 26 before the subcommittee.
“We obviously are responsible for keeping many taxpayers’ information secure,” Mnuchin said. “So within the budget we have prioritized technology spending within the IRS.”
Koskinen estimated it would take about $100 million to $150 million per year to update the agency’s IT infrastructure.
“Some day the antiquated IT system stops in the middle of filing season, I don’t want anybody saying ‘gee I wish we’d known, or how come nobody said anything about it,’ or to think that ‘well, overnight we can give you a lot of money and make up for 7 or 8 years of underfunding,” Koskinen said. “Every year the risks to the antiquated system get greater. The wheels haven’t fallen off … yet.”