The IRS Needs to Spend Its New Cash Hoard Carefully

The Internal Revenue Service finds itself flush with money, an unfamiliar position. Persistent operational problems at the agency and controversial enforcement provisions in the narrowly passed Inflation Reduction Act place the IRS under the microscope and in the middle of America’s rough-and-tumble politics. The agency will need to execute its responsibilities under the legislation almost flawlessly to avoid grave harm to tax administration and diminished faith in the government.

I have overseen the nation’s tax system. I believe a fair and efficient IRS is essential to our democracy. I also support additional funding for the service—albeit at levels well below those just provided.

The balance between enforcement and service is badly tilted in the new law. Enforcement gets 14 times as much funding. Treasury Secretary Janet Yellen has properly instructed the IRS to give immediate priority to restoring taxpayer services and eliminating its ruinous backlogs of unprocessed returns. Efforts to reduce the backlogs remain insufficient. Service management has the right to assign work under its union agreement and should immediately deploy additional teams of operational personnel to processing centers on rotating two-to-three-week details, forgoing other duties to work returns and answer correspondence. Only then will telephone inquiries fall to manageable levels.

I would counsel the secretary to add a comprehensive report on data security to IRS short-term deliverables. When the implementation plan she has requested is due in February it will be twenty months since the ProPublica breach. The news organization published the details of confidential tax documents pertaining to thousands of Americans. Spending any of the billions provided for improvement of systems housing taxpayer data before the IRS explains what gave rise to the calamitous leak and how the government will prevent similar future events would be irresponsible. The recent disclosure of another significant data problem only underscores the urgency of this matter.

Now is no time to experiment with untested organizational structures at the IRS. The service should establish a small office for implementation planning, coordination and monitoring, but leave line reporting in place at existing program and support units so they own rather than compete with the build. The four established business-operating divisions should remain. They are the proper place to resolve tensions between taxpayer services and enforcement for key constituencies, which will be a continuing problem given the skewed resources. The present two-deputy structure meets the challenges ahead, with one building infrastructure while another drives program performance.

The tax system has three components: government, taxpayers and practitioners. Government relations with practitioners have been strained, with the IRS giving short shrift to outside input. A flashpoint was the service’s refusal to extend first quarter 2021 estimated payments when it delayed the April 15 annual filing deadline. The IRS has stiff-armed practitioners even as they and the taxpayer advocate have expressed alarm about the impact of dysfunction and inaction upon small businesses and individual taxpayers. The government needs to rethink its approach to dealing with practitioners, who play a critical role in assuring taxpayers comply with the law.

The conflation of tax policy and politics with tax administration is damaging public acceptance of tax collection. The president’s April 2021 pledge to “not impose any tax increase on people making less than $400,000” jumped the wire into tax administration during the legislative debate. That encroachment is now reflected in Secretary Yellen’s directive that no new monies given the IRS be used to increase audits on small businesses or individuals below the $400,000 threshold “relative to historical levels.” In fiscal 2006, my last full year at the IRS, audit coverage for individuals was five times the 2019 level. There is plenty of room for increased enforcement still complying with the directive. Americans deserve to know what is being promised. Going beyond the statute to draw this line at all is troubling. The IRS can only maintain public trust if it implements the law as written, not selectively.

Americans expect nonpartisanship from the IRS, just as they do of the FBI and CIA. Over the years the IRS has enjoyed relative independence. That dynamic is changing. The Trump administration gave the White House oversight of writing tax regulations, reversing a practice in place since the Reagan administration which kept the process within the Treasury. A senior Treasury political appointee, rather than a career agency official, served as acting commissioner for almost a year. I cannot point to substantive problems from these arrangements, but they paved the way for further intertwining of tax administration with policy and politics.

In this administration, the Treasury shop most closely associated with the tax compliance initiative (described by some as overseeing the IRS) has been the Office of Economic Policy. The new legislation provides $50 million to departmental offices for “oversight” of IRS actions implementing the new law. The Biden Treasury must be sure-footed and is well-advised to keep a certain distance from the IRS. As I suspect it is already learning, the closer an administration gets to the agency, the more problems at the service stick to it.