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Leaderless IRS Threatens Credibility Crisis in Key Months Ahead

OCTOBER 23, 2022 | PUBLISHED IN

Quoted from Mark W. Everson Former IRS Commissioner; alliantgroup Vice Chairman, and Steven Miller Former IRS Acting Commissioner; alliantgroup National Director of Tax

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The absence of a confirmed commissioner overseeing the IRS next month couldn’t come at a worse time for the agency, observers say.

The IRS is reeling from a series of brutally challenging filing seasons with high expectations for how it will perform in the next one. At the same time, it’s making critical decisions now that will lay the foundation for how it plans to transform itself in the years ahead, thanks to the nearly $80 billion in extra money it received in the Inflation Reduction Act (P.L. 117-169). And that’s all about to happen without a confirmed leader at the helm.

When IRS Commissioner Charles Rettig departs the agency at the end of his term on November 12, an acting commissioner, appointed by President Biden, will take his place.

That acting commissioner will technically have the same authority as a confirmed one, “but substantively, it’s not the same thing,” said Mark Everson, who served as IRS commissioner from 2003 until 2007 and is now with Alliantgroup. A confirmed commissioner has the confidence of the president and Treasury secretary, which is crucial when the commissioner has to defend the agency or the tax system, he said.

“They just have more credibility,” Everson continued, voicing an opinion shared by others who spoke with Tax Notes. “It’s hard for someone who’s acting to take a decision that he or she knows will be controversial. They’re going to be more cautious, by definition.”

New leaders of any large organization, including the IRS with its 80,000-plus employees, usually arrive on the job with a vision of what they want to do, but that vision is naturally more limited when an official is filling the commissioner role temporarily and doesn’t know how long they’ll be there, said David Kautter, who holds the distinction of having simultaneously worn the hats of acting IRS commissioner and Treasury assistant secretary for tax policy.

A short-term acting commissioner will find it hard to put in place long-term strategies if they know they won’t be around to see them through, said Kautter, now with RSM LLP.

Jorge E. Castro, a counselor to IRS commissioners from 2010 to 2013, similarly lamented that the IRS — for several months at least — won’t have a Senate-confirmed commissioner in place during a “very politically charged time” for it.

All eyes are on the Biden administration to see who the president will announce as his pick to replace Rettig. For now, though, observers are baffled as to why the administration has taken so long

to line up someone to guide implementation of the Inflation Reduction Act, one of the biggest policy

initiatives of Biden’s administration.

“It’s a tough position to fill — I get that,” said Everson. Even so, the administration has known all along that Rettig’s position would open up in November and has known since August, when the Inflation Reduction Act was enacted, that there would be heightened urgency to get someone who can oversee the agency’s growth and transformation, he said.

“I think it’s a disappointment they haven’t moved on this,” Everson added.

The White House declined to comment on personnel matters.

All Access

The IRS shouldn’t be badly hampered by having an acting commissioner when it comes to more bureaucratic functions, like implementing legislation or overseeing a filing season, according to Steven Miller, a former acting IRS commissioner himself, now with Alliantgroup.

Instead, the biggest difference between an acting and confirmed commissioner is “the rooms that you can get into, and particularly your sway outside of the building,” according to Miller.

Within the IRS, an acting commissioner has all the sway he needs; much like the military, employees and officials inside the IRS follow the chain of command, Miller explained. But outside the IRS — in Congress, the White House, or Treasury — “you have a little less ability to go into rooms and hear what’s going on” and fewer chances to influence high-level decision-making or advocate for the agency, he said.

“That usually doesn’t matter — but it could,” Miller added. If there’s a blowup over something that requires others to get involved, for example, an acting commissioner won’t have the influence that a political appointee would, he explained.

To Marc Goldwein of the Committee for a Responsible Federal Budget, acting chiefs of federal agencies are commonly seen more as caretakers. “There’s this general view that you shouldn’t rock the boat when you’re in a temporary position,” he said. The next acting commissioner will be faced with a wide variety of decisions: who to hire, how to do training, best practices for audits, IT modernization project prioritization, and much more. “All those decisions are a lot harder to make when the person in charge isn’t really in charge, or doesn’t feel like they’re really in charge,” Goldwein said.

Helicopter Parent

Another key factor determining how much authority an acting commissioner wields is how closely involved Treasury decides it wants to be in setting the IRS’s direction.

“If Treasury says, ‘We think you should focus on A, B, and C,’ it’s hard for an acting commissioner to say, ‘Well, I think it should be X, Y, and Z,’” observed Kautter. During his tenure, Kautter’s top priority was obvious from the outset: Implement guidance for the newly enacted Tax Cuts and Jobs Act.

However, when it comes to the extra $80 billion in IRS funding, it’s less obvious how it should be spent, so it’s likely Treasury will want to be closely involved, Kautter continued. “It’s such a highvisibility endeavor, and the fact that it passed on a partisan basis doesn’t make things easier,” he said, noting that how the money is spent is sure to draw further scrutiny from congressional Republicans.

Already, Treasury Secretary Janet Yellen has indicated that Treasury will work closely with the IRS on its operational plan for spending the funds, due to be released in mid-February. And along with a bevy of campaign ads decrying the $80 billion generally, Senate Republicans have requested increased oversight of the spending by the Government Accountability Office and the Treasury Inspector General for Tax Administration.

Fortunately, the IRS won’t be without a plan to work with. Kautter observed that after Rettig departs, the IRS will still have a strong leadership team in place comprising longtime career officials, and that team will likely have agreed-upon plans that it can turn to for direction.

The arrival of an acting official might give agency leaders an opportunity to revisit some aspects of the plan if they had disagreements with Rettig, but they should still have an overall “strategy and a plan that was thoughtfully put together, and they will continue to execute on that,” Kautter said.

Everson, however, said that he was concerned with Treasury’s increasingly close involvement in the IRS’s affairs. The IRS should be accountable to Treasury, but it needs to have a degree of operational independence; otherwise, “if the commissioner is just taking instruction from the Treasury Department on all these issues, there’s a potential for meddling.”

The agency needs to be seen as nonpartisan, and it’s already become too politicized, Everson continued. “Tax administration has become much more visible as an issue in the elections, and that’s not good for tax administration.”

Everybody Loves Doug

If seniority and historic precedent offer any indication, the next in line to take over the acting commissioner spot at the IRS is Douglas O’Donnell, deputy commissioner for services and enforcement, although the Biden administration can appoint an alternative candidate, as former President Trump did with Kautter.

Observers agreed that O’Donnell is the obvious choice, and a good one at that. “He’s a very competent guy,” said Miller. Generally, the deputy commissioner for services and enforcement is functionally similar to a chief operating officer, and O’Donnell has been in that role since early 2021 in addition to serving in other key roles throughout his nearly 40-year career at the agency, Miller noted.

“He’s excellent,” agreed Castro, now of Miller & Chevalier Chtd., who was similarly enthusiastic about the prospect of O’Donnell filling the acting role. By dint of his current role, O’Donnell will be closely

involved in leadership transition discussions, and his long tenure at the agency bodes well, Castro said. If O’Donnell is selected, the IRS will be “in as good a set of hands as it could be,” Castro added.

For O’Donnell — or whomever else takes the spot — managing the upcoming filing season should be the top priority, according to Miller.

Following the recent difficult filing seasons, Yellen has set ambitious goals for the IRS to meet in the next one, which means close scrutiny. “It’s true what they say: You don’t survive a bad filing season,” Miller pointed out.

Next, the big priorities are implementation of recent legislation and assembling the operating plan for the $80 billion, Miller said.

Just Confirming

Confirmation of the yet-to-be-announced nominee could take a while, Castro cautioned, predicting that it’s unlikely it will happen before year-end. How lengthy and contentious the confirmation process will be depends on a variety of factors.

A nominee who has positive and effective meetings with Senate Finance Committee members and gains their trust and respect might make it through somewhat quickly, Castro said. But if control of the Senate flips to the GOP, the process could become more grueling, particularly given that Republicans have made the extra $80 billion a top political target.

Still, Everson expressed hope that partisan squabbling could be set aside and that the Senate would move quickly to confirm Biden’s nominee. That should have bipartisan appeal, because confirmed commissioners are more accountable to Congress, he said.

“So let’s get the new person in,” Everson added.