EO Tax Journal

1 – Views of Former IRS Commissioner John Koskinen (Part 3)

2 – Editor’s Notebook

3 – The EOTJ Mailbag

4 – TE/GE Releases FY 2018 Accomplishments Letter
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1 – Views of Former IRS Commissioner John Koskinen (Part 3)

What follows is Part 3 of an edited transcript of a December 17 Interview of former IRS Commissioner John Koskinen. Part 1 appeared  on Monday and Part 2 yesterday.

Background Note: John Koskinen was the 48^th Commissioner of the Internal Revenue Service from December 2013 to November 2017. He is a graduate of Duke University and Yale Law School. His career has included stints as Non-Executive Chairman of Freddie Mac from September 2008 to February 2012, and President of the U.S. Soccer Foundation from 2004 to 2008. Before then, he was Deputy Mayor and City Administrator of the District of Columbia, Deputy Director for Management of the Office of Management and Budget, Chairman of the President’s Council on Y2K, and CEO of the Palmieri Company.

Press Relations

Streckfus: Another one of my pet peeves as a tax journalist is I feel the IRS is always shooting themselves in the foot in relation to the press. Big corporations spend millions of dollars on their press and public relations people as they try to shape the news about them. My sense is that you were much more open to the tax press and trying to answer questions than your predecessors. A lot of times inquiries to the IRS seem to go nowhere. I don’t know what your successor’s attitude towards the press is or will be but he’ll set the tone for the entire IRS, including the press office.

Koskinen: It can be a problem. I agree with you about the importance of speaking to the press. Terry Lemons, my Communications Chief, when I started said, gee, I’ve got a job again because I was at the other end of the spectrum in terms of answering questions from the press. As I said, I did town halls in 40 or 50 cities and did a press conference in every one of those cities.

Terry kidded a Fox News reporter who, after every hearing with the previous commissioner, would follow him with a camera to his car while he was saying nothing. Terry told him at my first hearing that you won’t need to chase after the commissioner. This was because I made myself available to reporters after every hearing.

When I ran the day-to-day operations of the city of Washington as City Administrator, Serge Kovaleski, who got famous after Trump attacked him, came from the New York Daily News to the Washington Post. When I was city administrator from 2000 to 2003, I think the Post had four or five people full time covering the District and Serge was the most aggressive.

I told all the city agency heads that, if you don’t talk to the press, don’t complain to me about the story not being accurate. While you may not convince the reporter, your side of the story will be in the article and he’ll say this is what the agency says. He may then go on and say you’re an idiot and the place is falling apart, but at least your position was in the story. I told folks, you have to understand, if you don’t talk to reporters, you’re making their job much more difficult and so you shouldn’t be surprised when they’re not too happy about you.

Streckfus: Or you make the job easier because now I can go ahead with what I have, and just say the IRS had no comment.

Koskinen: It seems to me it’s part of our role and responsibility as public officials to be open. Now, the IRS historically, because of the great fear and concern about revealing taxpayer information, which is a crime, has tended to be insular.

When I set up a security summit and invited the CEOs for H&R Block and Intuit and the tax commissioners and payroll providers to create a partnership in the Spring of 2015 to deal with identity theft, many people said, wow, we’ve never done anything like this before. We were happy to have them write us a letter, but to actually have a partnership where we sit down and work together, that was new. The number of people who are victims of identity theft is now down by 70 percent since that partnership started.

I understand that most IRS people, like most public officials, are not comfortable being cross-examined by Congress or the press and always worry that they’re going to get misquoted or they’re going to say the wrong thing and it will come back to haunt them. But it does seem to me that dealing with the press comes with the territory and it’s important for an agency, whether at the state and local level or federal level, to be responsive, to be as transparent as they can be, because the public has a right to know.

The facts are what they are, the story is what it is. I’ve been around long enough to know, even in the private sector, that people’s natural tendency or hesitancy is to not get involved with the press. Maybe if I don’t say anything, they will go away. If I say anything, it may be viewed wrong. I think you just have to deal with the risks because it’s part of the responsibility of the organization and somebody needs to speak for it.

I do sense that Chuck is a good guy, but he comes out of a tax practitioner background so he’s never run a big organization or had to deal regularly with the press, so we’ll see how it goes. In the interim period, before his confirmation, you began to hear the same kind of stories, that nobody at the IRS will talk to me. Terry can’t do this on his own. He has to have the Commissioner’s support that the IRS is going to respond. It’s ultimately the Commissioner’s call. The Commissioner doesn’t himself have to do all the commenting but has to be supportive of people, whether it’s the Division Commissioners or the Deputy Commissioners, who do talk with the press.

An advantage the IRS has is the Commissioner is the only Senate confirmed political appointee other than the Chief Counsel. Everyone else is a career employee. So there’s an esprit de corps and a great sense of responsibility for the mission of the agency. When I was at OMB in charge of government management, I never quite understood that the IRS runs well no matter whom they appoint as Commissioner.

The transition to a new administration goes smoothly at the IRS because you don’t have to wait for five layers of political appointees to show up. It’s just the Commissioner and his five-year term isn’t even co-terminus with the President, except every 20 years. That’s an advantage and people feel almost like the British civil service in being responsible for the success of the agency. All the employees across the government are committed to their work, but there is a unique dedication at the IRS.

The other side of the coin is there are all these career people at the IRS who didn’t sign up to become public figures. When I started I said, if there’s a hearing, they get the Commissioner. I had a fascinating argument with a Senate committee when they wanted one of the Division Commissioners to testify about an issue and I said no, I’ll testify. I’ll bring the Division Commissioner along, but I will be the major witness. The Democrats were in control and I finally told them that for years you’ve complained you couldn’t get the Commissioner. Now the Commissioner is insisting he be the one to appear.

My view was, if you want to have a hearing, you get the Commissioner. The career executives have full-time jobs and shouldn’t be distracted for the days and weeks it takes to prepare for a hearing. One of the advantages of having five layers of political appointees is they do all the testifying, except in rare cases.

People came back and said the Hill was concerned that I didn’t know enough about what is going on. I said just tell them the Commissioner has been involved in the issue for the hearing, cares a lot about it, and knows more than anybody else at the agency, and I don’t care what the issue is. That worked just fine for a couple of years. I testified on anything that was going on until the Oversight Committee and Chairman Chaffetz got tired of me coming up all the time and not being intimidated.

So, we were told one day that the Committee was going to have a hearing and wanted the career executive to testify. I said no, you’re not going to get the career person. I said I’ll bring her with me if you’d like. No, no, was the response. We want the career person. We don’t want you. I said in that case she’s not showing up. Well, came the response, we’ll subpoena her. I said, that’s the only way you’ll get her.

For two or three hearings, Chaffetz would send a subpoena, I’d send a letter back saying the Commissioner was ready to testify and bring the IRS employee along. And then we would honor the subpoena.

In a couple of instances where a career person appeared, what happened was, first of all, the career person spent two weeks of lost time trying to prepare for the hearing and then, no matter how they did, they were always second guessing themselves about how they did. So there’s lost time and anxiety and unnecessarily taking people away from their daily routines.

I’m also concerned about sending career people to testify because they may get asked a question out of left field. They may feel they ought to respond and they’ll give information that is not quite correct. Congressmen Jordan and Chaffetz did that a lot, asking about issues outside the scope of the hearing. That’s why the Commissioner should be there, not just a career person.

Streckfus: I think it’s all about the attitude from the top regarding press access. Obviously that filters down. Whenever I’ve interviewed anyone at the IRS, there’s always been someone from Terry’s shop who will jump in if there is a concern. Usually the career people want to say more than Terry’s people will let them.

Koskinen: I agree the Commissioner sets the tone. I think it’s a disservice to the public, to the press, and to the agency to hunker down and say we’re going to give out as little information as possible.

Streckfus: I am hoping that Commissioner Rettig will be willing to engage the press. Sometimes the press can even be helpful in raising problem areas. Because Lois [Lerner] and Steve [Miller] tended to avoid the press I was never able to really talk to them. Yet I was constantly hearing from their employees about problems.

The three of us who regularly covered them — me, Diane Freda from BNA, and Fred Stokeld from Tax Analysts – our little gang of three who liked each other — we never approached them with ill will. We could have told them about all these concerns coming out that they needed to address.

One funny story. One day Diane and I were chasing Lois down a hall and she ran into the women’s room. I had to stop but Diane followed Lois into the women’s room and got to ask her questions. Maybe I should have followed them both in. I’m now sorry Lois was not more willing to interact with the press. Most of us were sympathetic to her difficulties.

Koskinen: She, like a lot of people, didn’t always buy into the need for interaction with the press. Even though she struggled with the management issues, she didn’t deserve what’s happened to her. I think she legitimately does feel personally threatened. Nobody signed up for that.

Responding to Problems in Lean Times

Streckfus: Do you have any areas that we haven’t discussed or other views of the exempt organization functions at the IRS?

Koskinen: I think it’s important to remember that the IRS responded favorably to the IG’s recommendations after the TIGTA report and the recommendations in the report from the Senate Finance Committee. We implemented them all unless they required Congressional action. I think the residual challenges are the ones we’ve talked about.

Now, are the EO folks so shell shocked that they are never going to do anything again? Is it ever going to be possible to get a better definition and set of regulations under section 501(c)(4) so as to give people better guidance? I always tell people organization charts don’t self-execute, restructurings don’t self-execute.

Over time, you have to have a system that is capable of absorbing problems, recognizing them, and responding to them and that’s not a structural issue. It’s risk management from the ground up. People have to own this and have to act because otherwise problems can get put off to the side. If you’re just cranking out reports once a year that nobody’s looking at, you should quit wasting your time. To make things viable and lively and keep them fresh is part of the challenge of management. It’s also part of the budget process.

The reason I was so involved with all of the leadership team is it’s a way to make sure that the budget decisions reflect reality. Several months into fiscal 2015 they suddenly cut $360 million from the IRS budget and we had nine months to figure out how to cover the loss. At one point we were even looking at how to shut down for a few days as the only way to deal with the budget shortfall.

I had the senior leaders all sitting around the table in a transparent process to decide what is best for the agency. Even if we had to cut your area, you got a fair shot at making your case. People understood the decision-making process. Morale suffers when managers are not a part of the process and don’t understand why they’ve been cut and someone else has not. Was it based on who knew whom? Is that why we were left out?

But if you’re sitting around a table and everybody says, okay, we’ve got to fund this but not that, and it makes sense, people feel much better and morale is a lot higher. More importantly, the decisions are much better, based on prioritizations set by a broader group. You also have to anticipate what to do with any new money. You don’t just go out and hire people because you can. Where are the needs most urgent? You need 50 people but we can only give your function 20. People are more supportive if they know why decisions are being made.

Retaining Able and Willing Workers

Streckfus: One of the complaints of IRS managers is you can’t fire a problem employee because of the civil service system and a strong union. I saw that firsthand in the seventies, and I’m told it’s still true. I know there are lots of dedicated IRS employees but it kills morale if you have employees who are either unable or unwilling to do their work. They’re often making the same salary as everyone else, so it seems very unfair. What are your thoughts or experiences?

Koskinen: It’s not a unique problem to the IRS obviously. If you want to get a vigorous discussion started with anybody in the government, just say let’s talk about problem employees. When I was in OMB It turned out that the government does fire a reasonable number of employees every year successfully. As for dealing with the unions, the unions really don’t have a lot of interest in supporting people who are just counterproductive. It’s a waste of the union’s time as well and they understand that.

My sense is that the problem in the government is that managers need to be trained to give fair and regular evaluations. I used to tell people when I was in OMB that you can’t rate somebody excellent for four or five years and then try to fire them because they’re non-productive. They’ve been rated as excellent.

So, two things. One, you have to be fair to the employees. You’ve got to give them fair notice, tell them you know they’re struggling. Second, you have to have a performance improvement plan, a PIP plan, that gives them three to six months to improve. If you do all that and the situation doesn’t improve, you’re free to take appropriate action.

Where you get in trouble is if you never fairly evaluated the employee and, in a lot of agencies, they don’t even do evaluations. OMB was that way and the complaint from the secretaries and support staff when I met with them was they never got evaluated. I said that’s not a good system. It goes to the core of personnel administration and I spent time talking to the personnel department, trying to get people to understand that you need to have a rational system. If you do that and employees are getting evaluated every year, they know if they haven’t done well. If you do that, you can proceed against those who are failing.

Managers can’t say I am just going to ignore the problem with nonproductive employees, because then it’s never going to go away. If employees know there’s been a fair evaluation, they know they won’t get support from the union because the system has been fair. Agencies need to support managers who are actually managing. However, when you’ve got managers constrained by resources and they don’t have enough employees, asking them to do evaluations takes time.

I always say the hardest thing you do as a manager is to do evaluations and sit down with employees. It’s difficult because you’ve got to sometimes tell people what they don’t want to hear. I had to do that with Nina Olson one year. She was a great employee but she was not pleased when I told her, Nina, you’re really off the wall over here and it’s really debilitating for the agency. Her first two annual reports were great, although I kidded her they were so long that they made good doorstops. But her executive summaries were thoughtful and very well written.

However, when her third annual report came out, I told her, you’ve mischaracterized theagency. She decided for this report, instead of discussing individual issues as she had in the past, she’d talk about the environment. I said you’re misrepresenting what people are doing. Her report made it sound as if the IRS was only interested in enforcement. I said we’ve got thousands of people on the phone trying to help taxpayers.

In my view, we’ve got to support managers, we’ve got to train them, and then there has to be enough time in the day for managing their employees because the managers all get evaluated and they need to be judged, among other things, on whether they are doing evaluations. The thing about management is you have to like it and I think evaluations are a good thing to do.

The processes are there for a reason. The evaluations aren’t a waste of time. It’s a way of making sure you’re reinforcing standards and helping employees. I always used to say, if you’re telling an employee something at the end of the year that surprises them, you haven’t been managing them during the year.

I asked for and got great recommendations from the union about how to improve employee engagement. One of the suggestions was to have managers talk to their employees at least once every two weeks. I said that will be worth its weight in gold. Managers must be able to talk to their employees on a regular basis.

When I did the evaluations for the senior executives reporting to me, nobody was ever surprised. If I had an issue, you heard about it in July, not in December. Otherwise, it’s corrosive not to know.

We also need to ask what in the system has created the problem employees. Most people don’t start their careers by saying, I’d like to be a problem employee, hard to deal with and non-productive. That’s just not most people’s career plan.

If you’ve got a lot of problem employees, you have to ask yourself, what am I doing wrong? Working with problem employees is not very rewarding for either side. I mean, it’s not fun for the employee to be there and they know everybody knows they’re not doing the work. What’s behind that, what have we done to create that circumstance? That’s not a question that people very often are willing to ask, let alone answer. I don’t think you can avoid it.

I think it is a problem that deserves attention but the answer from Congress is we’ve got to make it easier to fire employees. Well, no, it’s easy enough to fire them if managers are willing to do the work. But if you are just going to say, as President Trump has said, I can just fire anybody I want without more, then what you’re going to do is go to the other extreme. You’re going to have every employee feeling that I’ve got to do whatever I can to avoid the manager or I am at risk of an irrational reaction. Or they are going to go somewhere else because they could get fired for no good reason.

You can’t fire people at will in the private sector. You can’t just walk in and say you’re fired. You’ve actually got to give them notice, you’ve got to have a reason for it or you’ll get sued. It is easier to get rid of employees in the private sector but part of that is because the management process is more rigorous. There’s the bonus process, the review process. Managers are held accountable for how their division is doing and so they have an interest in making sure employees don’t become non-productive.

Streckfus: I’ve seen both sides. When I was at Tax Analysts, one of my jobs was personnel manager. This was many years ago when the organization had to be efficient to survive. InVirginia, where Tax Analysts is located, it’s pretty much hire-or-fire-by-desire. We tried to be fair but we could not afford to carry nonproductive employees so they were let go. I never saw anyone let go at the IRS.

Koskinen: In my experience the best time to fire employees is when you hire them. If you’ve got somebody not doing the job, again you have to ask what is the system producing? If you’re hiring people who can’t do the job and then you have to try to figure out how to fire them, the question is why am I hiring them in the first place? What’s my process and what’s my training regime? If all that runs well, then you’ll have fewer of those people who say, well, gee, he or she doesn’t know how to do this at all. Otherwise, you put a tremendous burden on personnel.

You also have to consider how the rest of your employees see a firing since it may affect their morale. The right thing to do is to treat people fairly when they leave and that’s an important point. Everybody who stays watches how you treat the people who leave. If you’re not paying severance when it’s been earned and you’re just getting rid of them unfairly on the spot, everybody else is going to see that there, but for the grace of God, go I. That could be me tomorrow, so you’re going to end up with all the remaining people updating their resumes.

Streckfus: That’s important. I was briefly with an accounting firm where on Friday afternoons they would fire people. On Monday morning, it was as if that person was never there and nobody was even to mention that person’s name. It was like an execution or something. I thought, wow, this is really heartless.

Koskinen: Well, you can’t expect employees to be dedicated to that firm.

Streckfus: No, they operate in fear of being next.

Koskinen: They know they’re just a widget. My experience in the private sector is people have to feel they’re part of the solution, not part of the problem. If they don’t feel that they’re going to get treated fairly, they’ll do what they need to do to keep their job but, if they get a better offer, they’re gone, and you would advise them that would be a good thing to do.

The view of a guy named Al Dunlap, Chainsaw Al as he was known, was to go into a company having difficulties and fire lots of people. At the time he was doing that I was running companies in the private sector and I thought, well, maybe that’s a better way to do it. It’s certainly not the way I thought would work best. It was fascinating to watch but it did not work out. He just destroyed morale, and productivity, at two or three organizations with that approach.
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Editor’s Note: The Washington Post reported on January 28 that Al Dunlap died on January 25. See “Albert J. Dunlap, Corporate Turnaround Specialist Accused of Accounting Fraud, Dies at 81.” According to his biographer John A. Byrne, “In all my years of reporting, I had never come across an executive as manipulative, ruthless, and destructive as Al Dunlap. He sucked the very life and soul out of companies and people. He stole dignity, purpose, and sense out of organizations and replaced those ideals with fear and intimidation.”
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Streckfus: The worst is that the good people leave immediately so then you’re really stuck.

Koskinen: That’s a great point. When employees get nervous, the people who are good can get a job easily and are gone and then what you’re left with are the people who can’t get anything else, so they stick it out but they’re not happy.

IRS’s Non-Tax Responsibilities

Alright, so what else do you have on your list? We talked about EO being outside the normal tax functions. I’ve told people it’s amazing for the IRS to be one of the biggest social welfare organizations in the government with the EITC and the child tax credit.

Streckfus: Why should the IRS be determining somebody’s eligibility for the EITC?

Koskinen: And turning itself into the Department of Health and Human Services? The reason is the work gets done. The ultimate irony is the IRS is always being criticized by Congress but, when they want something done, they turn to the IRS. Yet that does create problems for the IRS. Look at the EITC. Making proper payments has always been a problem. A 20 to 25 percent error rate is not good, but the statute is impossible to understand and implement when it comes to eligibility and payment rates.

I’ve read the statute and I’ve got to tell you, I don’t know how anybody figures out who gets paid for supporting the kid. It’s a statute trying to be self-executing in a context where there are single parent families and grandmothers and uncles and everybody else involved. I said why don’t we just say whoever’s got the kid on December 31 gets the tax credit and let the family work it out? No, you can’t do that I was told.

Congress wants the IRS to administer the program because the overhead rate is about one percent. If HHS administers it, their overhead rate is about 20 percent. What they’re really saying is they don’t want to pay HHS to do it and pay their government workers to do the recertification. They just want IRS to run the program even if it’s not administrable.

Streckfus: The IRS is mostly accountants and attorneys who are being asked to make social welfare determinations.

Koskinen: You have to sort through who is doing what for whom. I tell people part of the problem is that there are things that you see that you know are wrong, you’ve got data that shows it’s wrong, but you can’t correct it without doing an audit. There are a lot of these underlying things that need to be changed, such as the EITC statute. A formal audit is not the way to make many EITC adjustments.

Streckfus: EO has these social welfare issues as well, masquerading as tax issues.

Koskinen: But when the IRS agents look at a social welfare organizations to see if they are doing social welfare, they may also find benefits to the directors or managers that should be taxed or that they are involved in self-dealing transactions that raise tax issues.

Streckfus: Thanks for your time. It’s rare that we hear about the IRS from the viewpoint of a former Commissioner. I think, if nothing else, we have raised a lot of issues that need addressing in the coming years and hopefully the IRS will begin to see more funding to carry out its many responsibilities. Continue…

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