Archive for ‘Focus on IRS and Treasury’

EO Tax Journal 2019-30

Paul Streckfus, February 13, 2019 at 5:31 am

1 – Editor’s Notebook

2 National Taxpayer Advocate Releases 2018 Annual Report to Congress

3 IRS Office of Chief Counsel Allegedly Promoted Improper Use of PLR Process to Enable Abusive Tax Scheme by Bank of America Continue…

EO Tax Journal 2019-23

Paul Streckfus, February 4, 2019 at 5:36 am

1 – Editor’s Notebook

2 – IRS Office of Chief Counsel Name Change Announced

3 Commentary on Priority Guidance Plan and Section 4960 (Part 3) Continue…

EO Tax Journal 2019-21

Paul Streckfus, January 31, 2019 at 5:13 am

1 – Editor’s Notebook

2 TEGE EO Council – February 21-22, 2019 Meeting; Government Shutdown Update; Last Call for Early Bird Rates

3 Representative Deutch and Senator Whitehouse Introduce Bill to Close Ethics Loophole of Presidential Nominees

4 CREW Files Complaint Against Whitmer-Backing Political Group Continue…

EO Tax Journal 2019-20

Paul Streckfus, January 30, 2019 at 5:21 am

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 48th 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.”
________

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…

EO Tax Journal 2019-19

Paul Streckfus, January 29, 2019 at 5:38 am


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 48th 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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