EO Tax Journal

1 – Editor’s Notebook

2 – In the News

3 – House Bill Would Repeal Sections 512(a)(6) and 512(a)(7)

4 – Wyden, Tester Reintroduce Bill Targeting ‘Dark Money’ in Politics

5 – Who’s Who in the New Congress and What to Expect (Part 2) Continue…

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…

Views of Former IRS Commissioner John Koskinen (Part 2)

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

Views of IRS Workforce

Streckfus: I’m planning on giving your successor, Chuck Rettig, some written comments regarding the EO area so I’m asking people for input. Based on your experience at the IRS is there a better way in your view to organize them, to motivate them, to change the workflow? I even go so far as to say the EO functions would be better off outside the IRS in an agency just devoted to exempt organizations. The IRS, of course, would continue to collect any taxes due, just like the IRS works with the Social Security Administration in providing needed salary data and collecting employment taxes.

Koskinen: My sense is that there are things you could do to improve processing. When I got there, they were already using the Lean Six Sigma process for analyzing things. When I sat down with one employee who was talking to a taxpayer he was using the TEDS system, a case management system, and the page came up laboriously, sort of like the old modem days. As he talked to the taxpayer he needed the next page, which also came up very slowly. When I came back to Washington I said, wow, we’ve got to fix that system. They said, well, it’s part of the MEDS system and there are over sixty of these case management systems.

Complicating any fixes is the way the IRS deals with budget constraints by not replacing people and the people who leave first are oftentimes support staff. I learned about these problems as I went to two cities a week for three-and-a-half months to see all of the big offices. People told me executives were spending their time packaging case documents and double wrapping them and mailing them to the next place where other executives have to open them and scan them into another case management system. The complaint was that we needed support staff to do that.

The more I thought about it, I realized that’s not the problem. The problem is, why are we packaging all this stuff and mailing it? Well, it turned out because these case management systems oftentimes don’t talk to each other. So, if you want to move a case from place A to B, say you want it to go to Appeals, you wrap it up and off it goes by mail. It was my best example of what you learn from employees if you listen to them.

They are continuing to work on developing an enterprise case management program to take all of these systems and develop a single system. I was pushing this because it would make life so much easier for all the IRS employees on the phone talking to taxpayers if they could get access to such a system.

A big problem for taxpayers, something Nina Olsen is always talking about, is you call in and, if you have two issues, you’ve got one person for the first issue and then you get transferred to someone else for the second issue. And when you call back, you have to start all over again. If you had an enterprise case management system, when taxpayers called, whoever they talked to could see everything, when somebody had talked to them, what any letter said. It would be a sea change for all taxpayers, even those just calling back to follow up on one issue.

Improving IRS Computers

Streckfus: My sense is the IRS is hopelessly behind on implementing computer technology. I know there is never enough funding for IT and getting top IT people to work at the IRS is not easy. What’s your assessment of the situation?

Koskinen: It is hard to keep the best IT people. It’s actually hard to keep the best everybody because those include the ones who retire. I used to tell people don’t retire, that next year it’ll get better. So hang in there, by 2017 it’ll be good. That pitch had a limited effect.

What do you do where there’s never enough money to do everything and, in the IRS case there’s not enough money to do almost anything? What we did for the budget process, particularly when the cuts kept coming, was to ask a broader group to help us figure out what we could do.

Rather than have the commissioner, the two deputies, and the CFO sit around and decide, I said the people who know what’s important are our managers and senior executives. So, for the budget process, there was a group of about 40 senior managers, which met once a month, which we just turned into the budget committee.

Because a lot of the senior leadership team were new when I started, I said we ought to get together and spend a day or two getting to know each other. What to talk about? The group decided the budget and the requested initiatives divisions had proposed would be a good way to start. So we met on three separate days to consider the issues. On the first day we discussed the 65 initiatives. The proponents wrote them up and were given two minutes to talk about their proposal with eight minutes of discussion.

The first thing that was clear was that most people had no idea what anybody else’s initiatives were. They just submitted and argued for theirs. When we got done, the next thing we had to do was rank them. Everyone had 100 chits they could distribute to the initiatives they thought were most important. It was fascinating to watch people vote, in effect, against their own interest once they decided that another initiative was really important for the agency.

For example, Chief Counsel struggled retrieving, reviewing and producing documents because of an antiquated search capability. A new system would cost $5 million to $8 million, but that cost gets lost when you’ve got $200 million initiatives that need funding. But, after the review and discussion, this proposalbecame one of the highest priorities because people said it’s got to be bad for our reputation and a waste of time for lawyers and others, if we can’t respond quickly and efficiently both to FOIA requests and Congressional investigations.

That problem had been around for a long time, but it never was given priority because you didn’t have everybody saying, yes, let’s do that. The net result of our meetings was that a new case management system also got to be a priority. People said we need to do that, even with all the other things that need to get done. But it meant some of the things that needed to be done weren’t going to get done — and none of the 65 initiatives was something that wasn’t needed — but, for the agency, it would be better to do this.

The net result, as I’ve tried to get Congress to understand, is for us to implement the Affordable Care Act over three or four years, it took a billion dollars of IT work. Yet IT support for the ACA was zeroed out every year. That billion dollars should have been devoted to a wide range of other, important initiatives. I spent my last three months of my term on the Hill, like Eisenhower warning against the military industrial complex, saying, if you keep underfunding the IRS, it’s not a question of whether, it’s a question of when the system collapses. Either the IT is just going to not work or compliance is going to drop because the number of revenue agents and officers has dropped by 30 to 40 percent. I really do believe that, and I said you can’t turn it around on a dime. The biggest challenge throughout the agency is dealing with the budget cuts that directly impair IT and taxpayer service.

Streckfus: If you had an unlimited budget, how long would it take for the IRS to get to the point where I could call up, identify myself, and then somebody would have immediate access to my account and be able to help me?

Koskinen: Well, the IRS is trying to get there. My goal was to give you an account like the one you have with Bank of America or Fidelity, where you transact all of your business on-line. Once you get authenticated, you do what you came for. I am told by my former colleagues that they’re looking at products for a case management system now and hope to be operational in a year or two. They’ve got a wonderful procurement process going.

We had put together an agency-wide team to deal with this because IT projects usually fail because they’re IT projects. But generally they’re not IT projects, they’re business projects, so the business people have to own the partnership. Then you have to get procurement involved in the planning stage rather than, as is often the case, after you’ve designed the system. Just throwing the request over the transom means that procurement is often not quite sure what you really want to buy. So the group we put together for enterprise case management included executives from IT, procurement and the businesses.

We had meetings once a month to discuss progress, problems and opportunities.  The participants came up with great ideas. I said we should take all the IG and GAO reports on failed case management system work and see what we could learn from them. They ended up talking to a number of organizations that had built case management systems, including Social Security and the FBI. What we learned was fascinating and very helpful. People will tell you almost anything when you’re interested in their work. We received all sorts of great ideas of “don’t do this, do that, or do something else.”

I am told that by this coming September they’ll have completed all of their reviews and consideration of various alternatives and made sure the possible solutions can be integrated into the IRS’s complex systems. By the following May, which gets you into 2020, the system will be up and running. A simple thing you’d like to be able to do would be to call and, if it’s busy, we say we’ll call you back in 20 minutes or pick a time that’s convenient for you. To do that, you have to get rid of all the antiquated telephone systems. Not a huge expense, but $20 to $30 million.

As I tell people, there’s a limit to how much new funds you can spend in any one year. So, if you wanted to give the agency a billion dollars, you would want to do it over two or three years. Obviously, that hasn’t been a problem for the past eight or nine years. Over and over I said to Congress, you’ve got to have an IT plan and fund it accordingly. The IRS has a new strategic plan and IT is obviously an important part of that. Over three to four years, you could actually completely modernize of the system, including giving people on-line accounts.

Under the completed case management system, when you called, whoever you talked to would know everything about your relationship with the agency and you’d be able to get your problems resolved then. Most people would do it on-line. Nina Olson’s concern, as Taxpayer Advocate, is you’re going to disenfranchise all the people who don’t like to work on-line. I said you are describing my mother-in-law. You couldn’t force her to do an email. But, if we could get people off the phone who don’t want to be on the phone, then the phone service will be a lot better for the people who need it. But you can’t make it up out of a whole cloth and every time you do enterprise case management over two years, there’s something else you’re not doing because of lack offunds.

Streckfus: One thing that the EO tax practitioners keep begging for is to have a phone number that would get them to somebody at the IRS who was an EO specialist who handles only EO matters. This is beyond the practitioner priority line.

Koskinen: That’s a perfectly logical, reasonable request that the IRS ought to be able to do. First you ought to be able to electronically register. You ought to be able to say here’s my question and it would get sent to somebody who knew how to do deal with those questions.

All of that is desirable and understandable and has very little to do with internal organization. The biggest challenge for the IRS is they are a billion dollars short and there’s no magic tool in there. A consultant friend says the IRS should charge fees as they do in other areas that would help pay for the system. I gave him examples where that happens now, where people pay to get a certain service. But there’s no disagreement that things ought to be done that make life easier for taxpayers and for practitioners.

Lean Six Sigma

One of the issues that Sunita [Lough] did when she took over TEGE was to use a Lean Six Sigma process to simplify the application for tax-exempt status for small exempt organizations. There was a lot of push back from outside the agency. The concern was anyone could be a tax-exempt organization. We monitored the process and the audits showed that everybody and his uncle weren’t trying to become a tax-exempt organization. Before, the application process was one-size-fits-all, whether you were going to create the Rockefeller Foundation or the local PTA. You had to fill out the same 27-page form and provide all of the requested documents. The complexity was such that you also often had to pay some practitioner to help you through the process.

The only people really unhappy were some of those practitioners and some large tax exempts. The practitioners thought they were going to lose a lot of business and the established tax-exempt organizations were, to some extent, concerned about the increased competition for support. But concern about who qualifies is a legitimate concern. You don’t want to have people out there claiming to be (c)(3)s who don’t qualify. They may be raising funds to help their neighbor down the street, which is a great goal, but it doesn’t qualify them to be a (c)(3) tax-exempt organization. Nonetheless, the ability to fill out a two-page form to create a small, legitimate (c)(3) is a great step forward for people.

Anyway, needless to say, I am a big supporter of Lean Six Sigma projects that are going on. You always need to be open to, hey, can we do this better? What’s the most efficient way to get from Point A to Point B? The challenge is you need to be able to prioritize. What are our biggest problems? What changes will have the biggest impacts? What’s the biggest and best return for taxpayers?

As I said, if the IRS can get enterprise case management up and running, get you an on-line account and get a new phone system that would allow you to call the IRS and, if you did not get through, to get a call back in 20 minutes. That would totally change the taxpayer experience and it would be much more efficient.

As I used to tell people, it costs about $42 to talk to you on the phone, $52 if you come in, and about 25 cents to work with you on-line. We had ten processing centers in the old days that processed paper tax returns. With the onset of electronic filing, they were able to reduce the centers to five. The agency is now moving to having only two processing centers because the vast majority of people are now filing electronically. That’s a huge savings as the IRS goes forward.

EO Examinations and (c)(4)s

Streckfus: Let me ask you about EO audits. One of the concerns is that since the Tea Party brouhaha erupted, the IRS in the EO area has avoided taking on controversial cases, which is understandable. But going forward, if you’re Chuck Rettig, are you going to continue having EO lay back, or is it now time to say we’ve got to become more aggressive. Even the practitioners are now complaining that there’s little audit coverage.

Koskinen: The thing about (c)(4)s is they advocate about a lot of controversial issues like abortion that people feel strongly about. The temptation is, understandably, to duck it all. During the hearings and investigations about the “targeting” issue, the IG made a series of recommendations and one of them was to clarify the definition of who qualifies as a (c)(4) organization. The IG said that the facts and circumstances test then in use was too fuzzy and unclear. The examples the IRS provided to applicants of what’s acceptable go on for pages.

Two weeks before my confirmation hearing, the IRS issued a draft regulation, which was so far reaching that it would have decertified the ACLU and League of Women Voters for activities such as hosting debates or providing mock ballots. At my hearing, I was attacked for this draft regulation even though I had nothing to do with it. I thought, well, it’s probably gone a little too far.

The only time I got involved in the regulatory process was to sit down with a broad group of experts in the IRS and Treasury to try to define more clearly what is permissible and not permissible for a (c)(4) to do. We had received 67,000 comments in response to the draft regulation, the most comments ever received by Treasury and the IRS about any regulation before then. To learn more, I said, get me the most thoughtful commentaries and I think they decided anybody with more than two pages was thoughtful. I had 82 of these comments in a thick book and it was fascinating to see that the ACLU and the American Conservative Union, in alphabetical order, agreed on almost everything.

We sat down and had a series of meetings, including representatives from Treasury, EO, and Chief Counsel, and I said let’s work through these comments. We came up with a very workable draft. As we were working, I thought it was important to meet with Senator McConnell and others on the Hill to advise them what we were trying to do. As I told them in a series of individual meetings, the IG had said the current rules are confusing. People who are applying for tax exemption have a right to know with some certainty what’s allowable, ratherthan having the IRS using a facts-and-circumstances test after the fact. All I got was, well, that’s interesting. I tried to get them to understand there’s not a political bias in this project. Shortly thereafter, budgetary riders came along saying the IRS could not spend a nickel resolving the problems with (c)(4)s.

So, we stopped work, as required. But there’s a great draft out there that would clarify the requirements and limitations. The proposed regulations for (c)(4)’s would make it clear what you couldn’t do and what you could do in the context of an election and when not involved in an election. The reviews would be simpler and there would be more certainty for the applicants.

If one of the questions Chuck gets is, okay, you want to try that again? My sense is it would be a great thing for everyone if we could get out of the “facts and circumstances” test.

I don’t think Chuck has to sit down personally. I just felt it was critical to get that problem resolved if we could at the start of my term. It was obvious that this was a complicated area with a lot of moving pieces. I could also understand, especially after all the negative feedback, that employees would be nervous about putting their heads up above the parapets to work on this project, especially those who had helped draft the heavily criticized draft. So, I thought only the Commissioner was going to be able to get everyone together in a room, trying to revisit the issue.

In the (c)(3) area, I think there are more audits going on. The (c)(4) organization is the lightning rod, the third rail, but for the (c)(3) investigations, my sense is there are still reviews going on. The biggest problem is the reduced number of EO revenue agents, the same as in SBSE and C&I and for everybody else.

Streckfus: And losing the most experienced agents of those remaining.

Koskinen: I tell people you can’t just go out and hire someone and give them ten years of experience on the spot. I think some of the political concerns about raising this issue are lessening over time, but now you’re confronting the reality of antiquated systems and not enough people.

Why EO in the IRS?

Streckfus: Some argue that the IRS should not even be involved in EO issues pertaining to tax-exempt status since the IRS is a tax-collecting agency. Putting exempt organizations with IRS agents who are making determinations whether a pro- or anti-abortion group is tax exempt really has nothing to do with taxes, other than being exempt from them. We’re asking the IRS to be involved in religious and social issues, including election issues, all of which put them in the bull’s-eye because these are often controversial issues. Some of us would argue that the exemption determination issues would be better off in a separate agency that would take the heat, not the IRS. There is enough reason for people to dislike the IRS without having religious, political and social issues on their plate.

These controversies are not new. When I was at the IRS in the seventies, we had to deal with denying exemption to private schools that were set up to be racially discriminatory. The IRS had a hearing where people were lined up outon Constitution Avenue waiting to get in. Lots of these political, religious, and social issues are always trouble for the agency.

Koskinen: I don’t think there’s anybody in the IRS who would disagree with that other than the people in EO who would worry about being marooned.

Streckfus: I think they would welcome the challenge. I heard Sunita Lough say a couple of years ago that she tells new employees, “you are a revenue agent first, an EO revenue agent second.” I think she meant she did not want them so specialized that they could not recognize other tax issues.

Koskinen: The problem of moving EO is that it is part of tax administration because people are getting exemptions of one kind or another from taxation. But, as somebody once said, the only thing EO does for the IRS is create problems and mischief, which is why a lot of times it gets forgotten. Let sleeping dogs lie. If nobody calls me, I’m not calling them, whereas probably the biggest volume of controversial issues is in EO.

It’s true there are a lot of issues on transfer pricing and lots of other questions involving big companies. But, if you want to get people aggravated, tell them that we’re not going to recognize you as tax exempt.

I think it would help the IRS not to have that responsibility and I don’t think anybody other than the EO folks at the IRS would say, well, gee, that’s too bad. On the other hand, somebody’s got to do it. And, as you know, EO has a lot to do beyond determining exemptions for (c)(4)s and (c)(3)s. They’re doing all the state and local government reviews and they’re reviewing all pension plans.

Streckfus: Well, that’s TEGE. For just EO, the IRS would keep the tax parts like employment tax and still collect the UBIT taxes. It’s the exemption determinations that cause so much trouble.

Koskinen: Wherever it goes, it’s going to be a lightning rod, it’s going to be something to attack.

Streckfus: But it would be in one spot and not in the IRS, maybe a separate agency newly created. You could be the first head and have everybody beat up on you all the time.

Koskinen: It would seem like the Federal Election Commission.

Streckfus: Hopefully it won’t be as tied up in knots as the FEC.

Koskinen: There’s no doubt that EO brings to the IRS a lot of unnecessary grief. It’s debilitating for the tax administration function but, on the other hand, as I say, somebody’s got to do it.

Donor-Advised Funds

Streckfus: Moving on to my next issue, are you familiar with donor-advised funds and the commercial sponsors such as Fidelity?

Koskinen: Yes

Streckfus: While you were commissioner, was their exempt status ever raised as an issue?

Koskinen: It never came up. It was not an issue.

Streckfus: Never?

Koskinen: It never came up in my monthly meetings with EO; it was not an issue for them. Now, because of the tax law changes, donor-advised funds have become more visible. With the standard deduction going up, many fewer peopleare going to be able to itemize.

One bit of advice to taxpayers has been, on the year you plan to itemize, make a big contribution to a donor-advised fund and then you can distribute contributions out of that in future years. But that’s been true for a long time. But I assume the tax act will be a big impetus for more people to do this. I don’t know what the numbers are, but it wouldn’t surprise me that the contributions to donor-advised funds are going up.

Streckfus: Donor advised fund sponsors are becoming the 800-pound gorillas of EO. What you described is fine but there is anecdotal evidence that DAFs are being used by billionaires and others not necessarily for charitable purposes or only incidentally for charitable purposes. I’ve been told by attorneys we’re talking the Wild West with some of the schemes involving DAFs.

Koskinen: As I said, it’s never been an issue thus far for the IRS. The donor-advised fund determines which charities are eligible. My understanding is that, if you’re not an eligible charity, the donor-advised fund won’t make a distribution. It would be interesting to know what the process is by which they actually identify charities.

Streckfus: And also what goes on in the Silicon Valley Community Foundation’s donor-advised fund department. Apparently a lot of billionaires are passing interests in their stock, etc. to their own DAF, but nobody really knows where it goes or exactly what is going on but something is going on and I’m told a lot of itis not really serving charitable interests but in some fashion benefits the donors.

Koskinen: The purpose of the audit function is to make sure that the structure of the fund is appropriate and that it is run correctly.

Streckfus: I’m guessing the IRS has never looked at a commercial donor-advised fund sponsor. Fidelity Charitable is now the largest charity in the country based on it being a DAF sponsor. I bet the IRS, especially the attorneys in the Office of Chief Counsel, would be surprised if they saw what was going at some of the big DAF sponsors such as Donors Trust, Fidelity, SVCF, and a number of others that have assets in the billions. They are recognized by the IRS as charities but they are mostly just conduits, hardly your typical charity.

Koskinen: As I said, it would be appropriate now to think about them because I think the new tax law has got to be driving more people into donor-advised funds. The question is, how are they operating, are there issues? As I said, it never came up in my four years. That doesn’t mean it wasn’t an issue but, if it was, it was not as big as all the other issues that Sunita and EO were trying to deal with.

Streckfus: The lack of audit coverage is one of the concerns of honest EO tax practitioners. They say they file complaints with the IRS about outliers, but nothing ever seems to happen. There is a sense developing that lax EO regulation is making some EOs and their advisors more willing to test the outer limits and sometimes go way beyond what should be the limits in the EO area. Joint ventures is one area, impact investing another, where folks now seem to be able to make up their own rules since the IRS is not a presence.

Koskinen: If I were Commissioner and you told me these things, at my next meeting with EO I’d say, okay, what’s the story on all this? What should we do? I am always struck when people say, I sent in a complaint or a notice and nobody ever said boo. Part of that is not a structural issue. They’re questions of how do issues get raised and how do people know or determine what needs to be done?

As I said, the best thing the Commissioner can do is regularly give an opportunity to the leaders in the Divisions to raise things in a context where people need to be comfortable. If I raise the issue, am I going to get yelled at by the Commissioner? The Commissioner should say, okay, now what do we do about that, how do we go forward?

What you don’t want is having people come in and just tell you good news. Instead, just tell me your biggest problem and your challenges. That’s why I’m probably the only government executive who is a big fan of IG and GAO reports and reporters. As I always tell people, the investigators don’t create the problem, they just tell you about it before it gets worse and most problems don’t get better with age.

The question is, when there are issues, how do they get surfaced in a way that people respond? Ultimately, my hope was, as I said, through risk management and other ways, that issues would funnel up to the top of the organization. You can’t have too much communication going on.

(to be continued tomorrow)
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Views of Former IRS Commissioner John Koskinen (Part 1)

What follows is Part 1 of an edited transcript of a December 17 Interview of former IRS Commissioner John Koskinen.

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.

Streckfus: Usually I begin an interview by asking how someone got interested in their work, but in your case, it might take the rest of the day.

Koskinen: I have a checkered employment career that led to being IRS Commissioner. It was my second failed retirement, as everybody knows.

Recalling the IRS Brouhaha

Streckfus: I am going to start by asking you if you remember where you were on May 10, 2013.

Koskinen: I was in Washington. I’ve lived here for almost 50 years now and I remember reading the story in the Washington Post about the management issues at the IRS and I had two thoughts. One is that, as you read the article and a couple of subsequent articles, it was clear that management failures had happened and two, at some point in that period of time it was announced that the Acting Commissioner had been removed and there were major changes going on.

I thought, well, that’s not a good situation because I knew a number of people in the White House from my days in the Clinton Administration. It didn’t totally surprise me when, within a relatively short time, certainly a couple of weeks, I got a call from Presidential Personnel saying, “Hey, how would you like to be considered to be the IRS Commissioner?” I often get asked, “Well, how long did it take to really resolve that?” And I say, “About 15 seconds.”

As you know, I spent my full career, 21 years in the private sector and 25 in the public sector, primarily dealing with organizations under stress. I kid Senator Hatch, whom I got to know when I was the Year 2000 Coordinator for the country, that he made a speech on the Senate floor in May 2013 saying what the Administration ought to do is get somebody out of the private sector who knows how to manage and bring him in. I kidded him it was all his fault that I got fingered to be the IRS Commissioner.

But it really only took 15 seconds because, one, I love challenges, and two, having been in the executive branch, having been the Deputy Director for Management at OMB and the Year 2000 Coordinator, I well understood the importance of the IRS to not only the functioning of the government but to the country. IRS processes, as you know, 150 million individual tax returns a year so, for a lot of people, the only interface they have with the federal government is when they pay their taxes and, if they have a question about those taxes, it’s important for that interface to work well.

Streckfus: As you began at the IRS, what was your sense as to how things had been handled in regard to the alleged scandal? When Lois Lerner made her apology statement on May 10, 2013, at a meeting of the EO Committee of the ABA’s Tax Section, I was sitting in the first row. I immediately knew that something was up because she appeared to be reading from her notes in response to what we later learned to be a planted question. We found out later that Acting Commissioner Steve Miller and she had put a statement together to hopefully head off an imminent TIGTA report critical of the IRS’s handling of exemption applications. In the subsequent uproar Steve was fired by President Obama and Lois was relieved of her duties as EO Division Director. What was your sense of how that situation was handled by the Administration at that point in time?

Koskinen: Well, I understood that there was a problem. At that time I knew only what I was reading in the newspapers but my understanding was they knew the Inspector General report was coming out and it was going to be unfavorable, so there’s a natural inclination to try to get ahead of the story. The problem is that the process often is as important as the substance and having planted the question, it looked a little more defensive than it had to be.

There was clearly an issue that had been kicking around for going on almost two years. If at some point earlier in the process, certainly at the start of the IG review, the IRS had said, “you know, we have this challenge and this problem, We don’t know what to do with all these applications from organizations of all kinds that look like they’re politically active but want to be tax exempt. Nobody’s been turned down, but it’s taking too long, but we’re going to get this resolved. We apologize for the delay.” If that was said, if that had happened, I wouldn’t have been the IRS Commissioner.

I understand that when working on a problem like that, you’re trying to get it resolved, you’re hoping you can get it resolved. When you know bad news is going to come out, the tendency is to try to say, okay, how do I get ahead of it? It may not have been the most artful way to get ahead of it, but you could understand their desire.

Streckfus: I think Steve Miller has admitted that it was not one of his better management decisions.

Koskinen: Having spent a lot of time with large organizations as well, as you got more into the details, it was fairly clear that what had happened was a management failure. Nobody should have to wait two years for an answer to any question at the IRS so you can understand the challenge. You have the Tea Party organizations formed in 2010 in response to the Affordable Care Act, which they were concerned about as more government intrusion, and then Citizens United comes out saying corporations are individuals and so suddenly you get people saying, hey, now we can actually put together advocacy groups.

Suddenly, the IRS has these exemption applications coming in with names that look like they are going to be political groups, not social welfare groups. The first mistake, as everybody has conceded, was to only go by their names. You need to find out more about them than just their names.

Part of the problem is that, in a lot of organizations, bad news often doesn’t travel fast, it doesn’t travel at all. People tend to feel they should be able to resolve the issue and so it gets stuck in the middle. When Commissioner Doug Shulman testified that he didn’t know anything about this, I thought, one, that’s true and, two, that’s the problem.

A good example is General Motors and their ignition switch problem. There wasn’t a question that nobody knew about the problem, it was just that nobody at the top knew about the problem and, therefore, the resources of the organization weren’t deployed early enough to solve it.

The same thing with the IRS. The problem started to surface shortly after end of 2011, 2012, and that problem never got surfaced all the way to the top so the agency could have, as a group, said, okay, now we really need to solve this. As I said, if people in 2012 had said, “wow, we’ve got all these things we’re trying to work on and it may take us a little while, we apologize for that,” again, you wouldn’t have had this subsequent problem.

Streckfus: Another thing I’ve noticed over the years is that the IRS folks love to kick the can down the road. They did that when I was there in the seventies and it’s always tempting to ignore a problem for as long as possible. More than one IRS employee has told me the hope was you’d be long gone before the problem could no longer be ignored or it would be in someone else’s area of responsibility.

Koskinen: Right, and on this particular problem you can see the can going back and forth between Washington and Cincinnati.

Streckfus: And with a stop in Chief Counsel for more study.

Koskinen: The ultimate irony, as I look back on my own four fun-filled years is the fact that — and certainly the House Freedom Caucus people and their supporters didn’t want to acknowledge it — you don’t need an approval from the IRS to operate as a social welfare organization. But I apologized early on for the delay, saying nobody should have to wait that long. You do have a right to try to get an answer but the idea that it hamstrung people so they couldn’t operate doesn’t hold true. They could have gone out and engaged in their activities.

Now, the risk, of course, with the fuzzy facts and circumstances test that is applied to determine whether an organization qualifies, is you could be out there supporting these campaigns and advocating for positions and running the risk that the IRS would say, under the all facts and circumstances, this is actually not a social welfare 501(c)(4) organization. This looks like a regular corporation, and therefore all of your contributions are revenues and you owe tax on them. That’s obviously not a good result.

So it’s understandable why people wanted to get IRS clearance but it wasn’t as if they couldn’t have gone off and operated on their own and just filed annual returns. There are some (c)(4)s that do that. In fact, subsequent legislation was passed requiring people who do that to file a notice with the IRS saying, hey, we’re out here.

Another irony is that, when Congress thought it was important to know who is out there operating as a social welfare organization, it recognized they could be out there without bothering to let anyone know by filing the required annual returns. But having said all that, it did seem to me that this was not an excuse for not getting an answer any faster than a couple of years.

Streckfus: I agree with you. I think part of the problem was the way the IRS was organized. I always thought the reorganization in 1999 was a mistake that caused, at least in the EO area, a great deal of confusion and turnover and that’s why we got new leadership. Steve Miller left Counsel to be EO Division Director and then kept getting promoted. Lois Lerner came over from the FEC to be in charge of EO Rulings & Agreements and then took over as EO Division Director when Steve got promoted to TEGE Commissioner. They both ended up in positions where they probably weren’t prepared for the challenges.

Generally, I was a supporter of President Obama but I do have serious misgivings with how he handled the blow back after Lois made her apology statement. I was on the PBS NewsHour that evening when he made his statement that he was relieving Steve. I thought he overreacted because dismissing Steve and then having the onus on Lois seemed to me to just set up a situation for the Republicans to bash away while the Democrats retreated. Did you have any particular perspective as to how that situation could have maybe been better handled or do you think it was handled properly?

Koskinen: For someone in charge, whether it’s a city or a state or at the federal level, when you’re in the public domain, if there’s a problem, the first question people ask is, well, who is going to get fired? As you know, I was the Deputy Mayor/City Administrator and ran the city of Washington for three years. When I first started, I had known Tony Williams from when he was CFO at Agriculture and I was the Deputy Director for Management at OMB. Tony is a very bright guy who did a great job for eight years as Mayor of Washington but his initial instinct on things, because he had never run a city, was that if there’s a problem, we should fire someone.

My response to him was: “You know, if every time there’s a mistake, we fire somebody, that feels pretty good but, after a while, it will be hard to find people who want to take those jobs.” The District already had a reputation as being a good place to end your career, not forward it.”

In an otherwise favorable article, the only complaint the Washington Post had when I left after three interesting years was I had not fired enough people. Remember, while I was with the city, we had 9/11, we had the snipers, we had anthrax. I was afraid people were going to say there’s a black cloud over this guy and stay away.

My sense was that the President’s immediate response to clean house came without his really knowing how did all this happen? That didn’t work very well for the IRS. Then later, as you know, the President went the other way and on a TV program said there’s not a scintilla of evidence of political involvement, which, while it turned out to be correct, made my life a little difficult because several investigations were still continuing. I had to go to scheduled hearings where I was cross examined about the President’s comment, which, with the ongoing investigations, was seen by the Republicans like a rush to judgment.

Streckfus: Shortly after the President’s initial action Attorney General Eric Holder said they were considering an indictment against Lois Lerner. That probably drove her to take the Fifth, which I assume on advice of her private attorneys. Unfortunately, when you do that people assume you must be guilty of something.

Looking back, do you see that as being mishandled by the Obama Administration? I felt the Administration and the IRS threw her under the bus at that point and so she had to rely on her private attorneys who, I assume, were saying you must take the Fifth.

Koskinen: Again, hindsight is always terrific for making a judgment. For people now it’s easy to forget that, from that time in May, 2013, through the end of the year when the new commissioner showed up, the IRS was under tremendous pressure. The House Freedom Caucus and the conservatives had a heyday because you could get on television every day by claiming that this was all directed politically by the Obama Administration, the President or the Justice Department. Their message was that somebody was telling the IRS to stop these organizations so they can’t be effective in the 2012 election. Again, what that ignored was, if the organizations wanted to be active in the 2012 election, they could have just gone out and done it.

You have to understand that that pressure on Lois and her attorneys was such that they figured this is a bunch of people out for blood. A big problem for anybody being interviewed by the FBI and testifying under oath – as we’ve seen now with the Mueller investigation – is, if you don’t testify exactly correctly, say you make a mistake from your memory, you risk getting charged with making a false statement, even if not directly related to the original issue being investigated. It’s hard for me to fault how Lois’ attorneys were advising her.

Remember, I’m the guy they tried to impeach so these people were perfectly capable of harassing her and trying to find a misstatement in anything she said. The Fifth Amendment is there for everybody’s protection. But for the average person on the street, when you take the Fifth, it sounds like, well, you must be hiding something. Why don’t you testify?

Streckfus: That’s the problem because I think we now know that Lois wasn’t involved in any criminal acts.

Koskinen: I understand that when she testified under seal in one of the lawsuits, some thought that, had she said in public what she testified to the court, nobody would have been excited. I don’t know what the testimony was but I can assume she laid out just what we talked about, what we could see.

The IRS took a lot of heat for the first six months after her public statement and then, for the next six to twelve months, it was about, why can’t you guys just give us all your data? We ultimately gave them 1,300,000 pages. There’s not a single email from anybody outside the agency saying, hey, let’s get these people. There’s not a single email internally where anybody says, hey, you know, it will be great if we can stop these people from acting, let’s single them out. In fact, the IG ultimately, after two or three more years, issued his follow-up report just before I left, saying, well, they really did target liberal groups as well.

As I said at the time, going into it, clearly they targeted and singled out more conservative sounding groups because there were more of them. The vast majority were people, as I said, driven by the Tea Party movement opposed to the Affordable Care Act and anxious to organize groups to defeat it. If you step back, it looks a lot like a tremendous amount of smoke with no fire underneath it.

The risk is for the people involved, Lois, Steve, and others. It’s a difficult problem to have to explain to the people who say, well, you guys were picking on conservatives. When actually, they may not have been doing their job most effectively but they were not acting with malice aforethought, trying to get people.

Streckfus: Despite the hazards I just feel that Lois and the IRS would have been better off if she hadn’t taken the Fifth, because that allowed her accusers to create their own reality and make her the villain.

Koskinen: If she hadn’t taken the Fifth, if she had just laid out what I talked about, she would have gotten yelled out for not being the world’s greatest manager but it would have been much harder to them to make their accusations of political bias. People would still have asked how come you did that and what went on, and there still would have been hearings, but accusing Lois of destroying emails and targeting conservatives and claiming she was a liberal from the Federal Election Commission would not have been much of a story.

Streckfus: Unfortunately, they were able to find some quotes of hers where she seemed opinionated.

Koskinen: The quotes, as a general matter, indicated that she was a liberal Democrat, but, as I said, if you go through literally hundreds of thousands of emails, there’s nobody saying let’s get these people or let’s slow this down or let’s make sure they can’t do anything. Not a single email.

The IRS Workforce

Streckfus: So you came in as Commissioner and you had to deal with this mess that had been created. What was your impression of the IRS, in particular the EO functions and the individuals who you were dealing with at that point in time?

Koskinen: They had brought new people in. One of my theories of management is if you want to know what’s going on, go talk to the frontline employees. I told people I’d like to visit all the offices and they said, well, there are 500 of them. So I said I’d like to see some of the offices. I started in January [2014]. I was confirmed the 23rd of December so in mid-January I thought the first place to go was Cincinnati and talk to the employees there. I thought it was important for them to know I understood the pressure they were under.

Streckfus: I read they were very bitter because they felt they were being dumped on.

Koskinen: My thought was to let them know I understood their problems and we would be supportive. Just my being there I felt helped. It was fascinating to me. I met with a couple hundred frontline employees. I always did the town halls with frontline employees without their managers and then I’d do a town hall with the managers. I thought that I would hear a lot of people grumbling, complaining, saying woe is me. But it was reassuring, even amazing, that in the hour and a half we spent, mostly going back and forth, I didn’t hear anybody say, gee, I’ve got huge legal expenses or this has been a terrible experience or my neighbors don’t like me anymore.

The focus was basically how do we get the work done with the constrained resources we have, with the limitations we have? I’ve told people it was not what you would have expected if you went there and it was a tribute to the dedication to the mission of the agency of these people who had been criticized for months. The Cincinnati Enquirer was running negative stories about them. In fact, I was told by [IRS Communications Chief] Terry Lemons that he had been advised we should not talk to the Enquirer. Every place I go I do a press conference. So I told Terry, well, they’re going to know I’m here, it’s not going to be a secret, so when they call, I’ll take the call.

I grew up in Ashland, Kentucky, about 120 miles up the Ohio River near West Virginia. I did an interview with the reporter at the Enquirer who had been writing all these stories and, as often happens, his story after our interview was, local boy makes good, a guy from Ashland is now the IRS Commissioner. He then gave a positive view of the IRS and wrote what I said I thought we needed to do. It was an example of why I’ve always said, if you don’t talk to reporters, you should not be surprised when your side of the story doesn’t show up.

When I arrived at the IRS Ken Corbin was acting EO Director and then moved over to Wage and Investment. Then Sunita Lough came in to lead EO. As I’ve said many times and I really do mean it, having spent 45 years all over the place, this was as good a workforce as I’ve ever worked with. I’ve always said when an organization has major problems and I’ve taken over a lot of bankrupt, troubled organizations, the people are never the problem. It’s a question of leadership, of structure, of resources, of training. Certainly for the IRS, not only is the workforce terrific but the leadership training program is really phenomenal. I never had a problem with getting responses from the management and the employees, too.

The Buck Stops Where?

Streckfus: One of my continuing concerns with the EO functions is there’s not one person at the IRS who is really responsible for keeping the trains running on time. Obviously the Commissioner is ultimately responsible but you have people in the TEGE Commissioner’s office, in the EO Division, in Counsel, in Appeals, even in Income Tax and Disclosure for some EO matters, so it’s easy to say it isn’t my responsibility when something goes wrong. When I read about what went on with the Tea Party cases it was obvious to me that no one was really in charge and able to say, we’ve got to get this fixed now.

Koskinen: It’s a good point. It applies in some ways to all of the silos, as I call them, at the IRS. So that siloization of the agency as part of the restructuring raises interesting issues. Part of what happens with EO at the top of the IRS is you don’t pay attention to it because there are so many demands on your time coming from Wage and Investment, SBSE, and LB&I. They all involve tax administration and collection, so it’s easy for EO to be off on the side since they’re not collecting a lot of money. But as somebody said, you get more interesting challenges there than you get elsewhere.

Back to your point on who’s responsible. The question is how do you get those issues to the top when they come up and get stuck? We created an enterprise risk management process. At all my town halls I’d say enterprise risk management only works if every employee — frontline workers, mid-level managers, senior managers — feels that it’s not only possible but it’s their responsibility to raise their hand if there’s a problem.

At my confirmation hearing, I said if there’s a problem, it’s my problem and we’ll fix it. If somebody makes a mistake, it’s my mistake and we need to fix it. My mantra for everybody, one of several, was the only problem you can’t solve is one you don’t know about. Also, we don’t shoot messengers, we thank them. I told managers for that to work employees have to believe it’s true.

Streckfus: A lot of managers want their employees to follow the chain of command. They don’t want somebody going to the top with a problem.

Koskinen: I told managers that your employees who work directly for you have to be comfortable coming to you. In addition, we had a mailbox, one for the Commissioner, which almost never got used, for reporting problems. Risk management had a mailbox that they set up. But you’re right, the risk, so to speak, is that, after employees raise their hand, the manager will feel either I don’t want anybody to know about the problem or I should fix this myself, it’s my responsibility, that’s what I get paid the big bucks for.

One of the things I did was I met every month with the IRS leadership, not just the Division Commissioners. The Commissioners could bring anybody they wanted. Of course a lot of people thought, hey, you get to meet with the Commissioner. So I’d have the top six or eight executives out of each division come in once a month and talk about whatever they wanted. They would also send materials in. The rule of the game was they had to assume I had read the materials so we just had a discussion for an hour and a half about what was going on in their divisions.

Over time, people would tell me we’re having this problem or we’re slow here or something else is going on. When I started we were implementing the Affordable Care Act. Then implementing the Foreign Account Tax Compliance Act (FATCA) became a major challenge while it turned out the Affordable Care Act was chugging along dealing with its challenges. For FATCA it became clear that IT and LB&I were ships passing in the dark in terms of nobody was coordinating solutions for, how do we get this done? Only the Commissioner can do that, but if nobody asks the Commissioner, if nobody tells the Commissioner there’s a problem, then the Commissioner isn’t able to  make decisions.

Streckfus: And of course, you have responsibility for 80,000 employees and you could have ten new critical issues on your desk each morning and where do you start? As I believe Obama once said, what scared him about having thousands of federal employees was that each day at least one of them was screwing something up that he would be held responsible for.

Koskinen: People used to say to me about tax administration, how complicated can that be? People file returns, you look at them, you give refunds. I said, sit in my office any day and just watch the issues as they come through.

But back to where we were. I think the problem for EO administration was less that there wasn’t anybody responsible but much more that there wasn’t a way for issues that were stuck to get surfaced. For problems to sit around for two years is wrong.

Streckfus: And even more in some of those cases.

Koskinen: Let me say again, nobody got denied, they just got delayed, and the delay itself was, in many ways, a denial.

Streckfus: I think a lot of EO tax practitioners understood that but the scandal scenario was just too juicy for many who already disliked the government. Never let the facts stand in the way of a good story.

More on the IRS Brouhaha

Koskinen: The Senate, at least while I was there, never held a hearing on the delays in processing exemption applications. I must have gone to twenty House hearings. If you’ve been in Washington a while, you know, if you’re a Senator, you’re one of 100. You can say it’s a nice day outside and people will be interested. But if you’re a Member of Congress and one of 435, you’re mostly anonymous, so your goal in life is to get an issue that gives you visibility. Then once you find the issue, the last thing in the world you want is for the issue to go away.

That’s why we had three or four years of Benghazi. Then you had four years of Lois and the IRS because, as a Member of Congress, you can raise money, you can be on Fox News every night. If you google Koskinen, what you’ll get is a whole set of Members of Congress on Fox News or YouTube cross-examining me. The Ricketts family, who own the Chicago Cubs, offered a million dollars to support candidates for Congress who would support impeachment of me. I grew up in Cleveland before I moved to Kentucky, so, as luck would have it, in 2016, the Indians, for the first time in a long time, were playing in the World Series against the Cubs. The only directive I ever gave was I told people “nobody roots for the Cubs.”

Streckfus: After you were there, it seemed like crazy things kept happening, like disappearing emails. What was your sense at that point, was it just screwed up communications or inept people?

Koskinen: I refer to this as the gift that kept on giving. At the start you’ve got this claim that political forces are directing the IRS and then everybody complaining that the IRS isn’t producing documents fast enough. When I called [Senate Finance Committee Chairman] Orrin Hatch when I had been nominated just to touch base with him, he said, would you just tell [Acting Commissioner] Danny Werfel to get us the information. I said I will, but obviously they’ve got to be trying hard.

Well, it turned out to search emails, you had to pull the hard drives off computers and then download them, and then you had to put them into a file and you had to search them to make sure you weren’t revealing taxpayer information. The IRS and the various investigators finally had agreed, before I got there, that they would look at 82 to 88 custodians, as they were called, rather than the entire agency because it was going to be hard enough to find all of the emails for the custodians, the people most directly involved in the processing of social welfare applications.

They’re working with that laborious process and the delays in providing documents become the issue and I’m getting yelled at in hearings because we’re not producing documents fast enough. That’s in February or March, 2014, in a hearing. The House Government Reform and Oversight Committee had provided a subpoena in August [2013] to Werfel and the Treasury Department demanding a wide range of documents, some requiring a search of the emails of every employee of the IRS. They reissued the subpoena in February [2014]. One of the issues was they wanted all the communications between anybody in the IRS and anybody in the White House or externally.

The subpoena had all sorts of requests, and Mark Meadows, now the head of the House Freedom Caucus, asks me, when should we find you in contempt? And I said, well, whenever you think you can prove it in court. I said we’re providing materials as fast as we can. They were grumbling so I told them, if you want us to review 100,000 employees, it will take years. Is that what you want? Give me your priorities. They said we want all Lois Lerner emails. I said, okay, so we began getting all of her emails.

A few weeks later in April, I’m advised that Lois’ hard drive crashed in 2012. I said, wonderful. There are emails around that crash that show that Lois was working with IT to try to reconstitute her emails because she was worried about losing them. I said what we need to do is figure out how many of her emails we can find in the computers of the custodians. If she sent an email, it should be in the recipient’s computer. If they sent emails to her, they should have what they sent. So we did that. We found 24,000 emails from the crash period. We then in June filed a full report and talked more about the email crash and how we got 24,000 emails, which we were then providing.

The next big issue is why I did not immediately report the crash to them in April. Nobody explained why between April and June — six to eight weeks — it made any difference whether they knew about the crash. But the biggest complaint about me was, “you hid that from us and you didn’t tell us” and I said, “well, I just told you.” They said Lois was obviously destroying evidence. I said no, if you look at the emails, she was trying to get them reconstituted. “Well, you lost all these emails,” they argued. I said, “we found 24,000 for you,” but 24,000 was a number nobody cared about.

I discovered that, if you are a Member of Congress with an agenda, what you do with information that is inconsistent with where you are going is just ignore it. I would provide the data or the response to a question and normally you’d think people would say, well, that’s not right or you looked in the wrong place. But a number of members of Congress determined that the best thing to do when I provided an inconvenient fact or answer was just ignore it and go on to the next question.

There was a hearing in 2016 before the Judiciary Committee. We’re three years later and somebody said, well, what’s the difference between Lois’ hard drive crash and Rosemary Woods? I said we have no idea what was in the 17-18 minutes that Rosemary erased. We have 24,000 emails involving Lois from the time of her hard drive crash, none of which say anything exciting. It was clear these people had never paid attention to the fact that we had provided those 24,000 emails.

Of all the things that went on, I thought it was important to give people a full picture of how Lois handled the hard drive crash. She tried hard to recover her emails. Now here are the emails, nothing significant has been lost. It turned out a reasonable percentage of hard drives crash every day, two to five percent. When we looked again, another five or six of the 88 custodians had had hard drive crashes, which we reported to Congress immediately.

The next day the headline was, “Five More People’s Emails Lost.” Well, for three or four of them, they didn’t lose any emails in the crash. I tried to get people to understand that’s why you don’t give the first piece of information you get without providing the full picture. Otherwise, the quick response is everybody lost emails and people think the place is out of control, when it turned out the number of emails lost was miniscule.

Having said that, the Freedom Caucus members participated in hearings in June saying we don’t believe you. Then, the question was, well, okay, what about back-up tapes and these disaster recovery tapes? Danny had said they usually get recycled every six months. In June of 2013, he said we’re saving them. These then started to pile up all over the place. I said that’s the process for saving them.

We did save them all as they were created. However, they had changed servers sometime in 2011 or 2012 and so they had old servers and old materials in a closet full of junk in New Carrollton. Emails had gone out from Terry Mulholland saying don’t throw anything out. But two guys on the midnight shift in West Virginia get this box labeled junk and got rid of it all, including the handful of old, disaster recovery tapes. Again, you would have thought from the news that this was a conspiracy to destroy evidence. Everyone ignored the fact that the Inspector General, who had found the issue and investigated it, said that this was simply an unintended mistake, not directed by anyone.

All of this ends up being my fault even though I wasn’t there in 2012 or in 2013, which didn’t surprise me because it comes with the territory. It was a way to keep the issue going. By this time, they had given up on it being the fault of the President or the White House or anybody outside of the White House. They had actually given up on there being any incriminating emails and now all they could say was. “oh well, the stuff was destroyed, people were hiding stuff from us. There must have been a smoking gun in there somewhere.” So the hearings were a lot of fun.

Streckfus: I think I listened to probably every one of those hearings. I developed a personal disdain for Jim Jordan, the Republican firebrand from Ohio. I thought he was just outrageous in the way he treated you and other IRS representatives. He did it again last week at a hearing on the Clinton Foundation. I don’t know if you saw the movie Animal House, but Jim Jordan reminds me of the character Doug Neidermeyer, both in looks and demeanor.

Koskinen: I didn’t see the hearing. I just got a note that there had been a last hearing in which EO came up, but I was not mentioned. What did he have to say last week?

Streckfus: He attacked Phil Hackney, a witness for the Democrats, who was an attorney with IRS Office of Chief Counsel during the Tea Party matter and now he is a law school professor and the Republicans were mad at him because he wrote an op-ed for the New York Times blasting the Trump Foundation. Jordan got on him and instead of asking him anything about what was going on at the hearing, he just attacked him, asking him if he were involved in the scandal when he was at the IRS. That’s Jordan’s approach, come on strong and act outraged.

Koskinen: Part of the issue when you hold those hearings is you’ve got one witness and 35 committee members. It’s easy over time to become a bully and to assume that you can just browbeat witnesses. Jordan was forever flashing up pages on a screen nobody could quite read and then arguing about them. I would say, could I see that document? And he’d give it to me and I’d say, well, you know, if you read the next paragraph or the next page, it explains things but it’s not up there. I think what aggravated Jordan more than anything else was he was not used to people saying that’s not right or that’s not true. I think he kept hoping either I’d collapse or yell at him or something. He’s the only guy who shows up at hearings in his shirtsleeves. I never figured out what he was trying to prove.

Streckfus: I think that’s part of his blue-collar act.

Koskinen: His macho image, man of the people.

Streckfus: Former wrestler.

Koskinen: And he was a good wrestler in college. In fact, he was a national champion and became a successful college coach. My favorite Jordan story involves an award I was given. The National Academy of Public Administration every year or two gives an award for outstanding career management achievement as their ultimate honor. In 2016 Bill Ruckelshaus and I were selected for the honor. A nice guy named David Chu was the NAPA Chair of the Awards Committee that reviewed all that. Six to nine months later, Chu is testifying about something relating to GAO and Jordan, out of the blue, says, how could you give an award to Koskinen? What was behind that? Who paid you to do that? I thought, Congressman, let it rest.

Streckfus: We know it’s all part of his act, he loves to showboat, and it probably goes down well in his conservative district. He was even recently being considered by some of his colleagues for House Minority Leader.

Koskinen: Yeah, nobody was going to run. I thought, well, that would be good for the party.

(to be continued tomorrow)
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