We recently had an opportunity to sit down with IRS Commissioner John Koskinen for an exclusive interview, and in addition to our own questions, we were able to ask him many of those we had gathered from our readers. (See “Tax Pros Have Questions for New Commish.”)
Our wide-ranging conversation covered everything from EITC checklists and the future of the RTRP to busy IRS phone lines and balancing service versus enforcement; a full transcript follows.
One of our readers was concerned about the Practitioner Priority and Taxpayers Assistance phone lines being insufficient to handle the calls to resolve taxpayer problems. Are there steps that the IRS can take to alleviate some of the burden on those phone lines to respond to the questions from the tax preparers?
Koskinen: Well, we are concerned about the delays because obviously we have a big stake in tax preparers being able to get prompt responses on behalf of their clients because obviously the more accurate the information we can provide, the more likely [it is that] their return will be complete and accurate and won’t require any further action on our part. So, yes, we've had a whole set of difficult tradeoffs and decisions to make because of the resource constraints under which we’re operating.
I've just been in St. Louis today on my “Join the IRS and See 25 Cities” tour and talking to people in the call center, and they also are concerned about the limitations of the information we can provide to taxpayers generally. But, clearly, it’s a high priority for us to deal with the professional tax preparer community because you really are in a lot of ways partners with us in trying to get information to people about what the right amount to pay is and figuring out how to get it done.
So one of the things that we did this year was try to limit the line to people actually working with clients, trying to resolve their issues as a way of trying to take some of the pressure off the line. I take the point about sitting on the phone for a half an hour, an hour, hour-and-a-half, and obviously it’s hard enough and bad enough for taxpayers, [who] usually have a question or two. But for a tax preparer, who may have a series of clients -- I wish there were more we could do because obviously it’s not productive for you or for us to have that kind of backlog.
So all we can do is try as we have to cross forward and try to make the Web site more user-friendly and to try to get more information updated there both for practitioners as well as the average taxpayer. As I say, we've had to cut out a couple of services to professional preparers that we’d rather be able to provide. If we ever get the resources, we’ll provide them again. But our sense was, when we looked at it, they had a lower utility than some of the more general calls [specifically, the Electronic Account Resolution service and Disclosure Authorization services].
One of our readers had asked, how do we get the preparer population to be licensed so that paid preparers have been properly schooled and passed an exam? Obviously, with the recent court ruling, that’s an issue on a lot of people’s minds. Could talk about that sort of generally, and then give us specifically some notion of the issues you’ll be thinking about or the things you’ll be weighing as you go about making the decision whether to appeal, for instance, or whether to pursue a legislative remedy or to offer a voluntary credential.
Koskinen: Well, we’re obviously looking at all three of those. We’re disappointed with the decision, although the decision is fairly final in the sense the only appeal would be to apply for a writ of certiorari to the Supreme Court. Getting a writ granted by the Supreme Court is unlikely in most cases and probably unlikely in this one as well. We don’t have controversy between different circuits.
We just had a meeting yesterday talking about it, you know, so we’re reviewing it, but it would be a long shot. Obviously, a legislative fix would help us, and so we’re also taking a look at trying to figure out how to get that pulled together. We've had some indications of support in the Congress, although I recognize that in today’s political climate, getting legislation to give the IRS authority to do anything is probably a bit of a stretch. So it may well be that our best approach, and we are looking at that as well, is whether, as I've said in the past, some sort of voluntary program would be productive. It would be a way of offering kind of educational support for preparers.
The people who are going to be cutting corners are probably not appropriate preparers, are unlikely to accept the volunteer offer. But my sense was we would get a reasonable percentage of people who would be delighted to take the course or courses over time and get a certification from the IRS if they're not an enrolled agent. But, on the other hand, a certification that they’ve met sort of minimum standards that they might be able to market or people might be more comfortable going to them for.
There have been some people saying, Well, the whole thing was an attempt to drive small preparers out of business, so everybody would go to large preparers,’ and that’s clearly not the intention. We are just concerned that we have, I think, a responsibility to do whatever we can to make sure that those holding themselves out to be preparers have some minimum experience and qualifications for taxpayers. As somebody noted in one of the responses, hairdressers are regulated in all 50 states, and yet getting your tax return prepared, you can go to almost anybody operating out of the back room or his car, and in most states you can do that. It just seems to us that we ought to do something.
Obviously, the problem from our standpoint for the voluntary program is that, when it was going to be a mandatory program with our contractor, we could predict pretty well what the volume was going to be and organize it appropriately, including structuring the fees. If it’s a voluntary one, it gets a little more difficult to project. But I do think that we at least ought to take a hard look at that.
How do you envision a voluntary system being different from the current enrollees in the process?
Koskinen: Well, I think it would be kind of a more minimal level of requirements. Education for an enrolled agent is much more thorough issue and allows you to practice before the agency. This would be, you know, an attempt to make sure that people have kind of a minimum understanding and can meet standards, but wouldn’t necessarily be at the level of detail that would allow you to practice before the IRS.
Somebody had asked about when the IRS plans to introduce a searchable directory of enrolled agents. Are there any plans for that or even a directory of other types of tax practitioners like CPAs and maybe some of the people who did get those RTRP certificates?
Koskinen: We haven’t, at least that I know of, had any plans at this point to create that kind of a directory, although it would be helpful to taxpayers obviously to be able to look at who is certified as an enrolled agent, and if we had voluntary compliance with the more minimal standard, if we had a list of all of that.
I suppose the issue just off the top of my head is that it’s awkward for us to be in a position of looking as if we are actually supporting or encouraging people to go to only the group of people who are in the list. I assume we’d get some pushback from that as we go. But I understand it would be helpful for taxpayers to know who had met basic standards.
I guess the other side of the issue is attorneys and CPAs and others getting special treatment. So the question is whether we have a list of all attorneys and CPAs as well out there. So it’s a more complicated situation than just listing the enrolled agents.
There's a feeling among some tax preparers that some of the due diligence requirements that are being pushed on to them in terms of, for instance, the EITC checklists, make them feel as if they're being conscripted to do some of the IRS’s work for them. Do you have any thoughts on that?
Koskinen: Well, actually, it’s a good question. The EITC is in a separate category, so we’ll talk about that in a minute.
As a general matter, I was actually delighted to see the question because we really don’t want preparers to feel that they’ve got to now go collect every document, review each document, in effect, audit the return in a level that an IRS agent would do. So we think they need to be comfortable that there is support for what it is they're putting in the return, just as a taxpayer would be comfortable with that. But we don’t think that the preparer needs to be in a position of having certified that they’ve actually got all the documents in tow and they’ve looked at them all and, in effect, they’ve done the first review as if they were a revenue agent.
So, as long as they're in good faith comfortable that the information they’ve got is appropriate for the return, which is what their standards have been for a long time, we don’t intend to have to have changed that as a general matter.
Now, EITC is a case where we’ve more recently asked for more activity by preparers because obviously the statute is very complicated, and seems to get more complicated by the day. We have a challenge of improper payments under the program that get determined to be at a large volume. So there we are asking preparers to go answer a set of questions [to prove that] they’re satisfied that, again, the information they are putting into the return is appropriate and has some basis behind it. Again, when people have a large list of deductions, we’re not asking the preparer to go through and certify each deduction but to certify, you know, to look at it and say this is the information that would be appropriate for supporting the return.
So, again, for EITC we’re not asking them to start doing house visits to determine where the children are actually living, but to at least have made enough of a preliminary inquiry that they’re satisfied that the return they’re filing is accurate.
But I recognize there are more questions for EITC than probably some other things, and we’re concerned -- we don’t mean to be driving preparers out of the preparation of EITC refunds, and there’s been a trend in that direction, that there’s a slightly or a somewhat smaller percentage of those returns are now coming in through preparers as opposed to people doing it themselves. We certainly didn’t intend that preparers decide it’s not worth the effort. We need their help.
It’s an area where I think a lot of the improper payments are just individuals not understanding [that] there are somewhat complicated rules, particularly around dependents. If you're single without a dependent, the refund is relatively modest, but that’s fairly straightforward as long as you're reporting the right amount of income. So that’s a more standard issue.
It’s when you get into the question of how many children are there, with whom are they living, and who they lived with for six months or more this year, and if people are separated, who’s claiming them, or even if they're living together, who’s claiming them are the kinds of things that are very complicated. And our information is [that] eligibility changes for about a third of the people every year. So it just tells you how fluid that situation is.
So I understand and appreciate that preparers don’t want to be, in effect, revenue agents, but this is one area where we hope that we could get cooperation from the preparers and work with them. While the penalties have been increased, for the average preparer who is doing a perfectly good job and doing it the best he can, we’re trying to work positively with them.
The bigger problem is much like qualification for preparers. The bigger problem are the people on the periphery who are either going to help fill out the return and not sign it so there are probably a reasonable number of people filing returns on their own or are actually having them prepared by somebody who is kind of a peripheral preparer.
So I understand the EITC is a little out of the norm, and we just hope we get as much cooperation as we could. But as a general matter, we’re not intending to have preparers feel that they’ve got more now requirements than they’ve always had to make sure that the information on the returns is correct.
Given the limited resources, do you see a conflict now or developing down the road between service and enforcement about treating them as equal responsibilities? Will there come a time when you might have to prioritize one over the other?
Koskinen: Well, we keep looking at, with the resources we have, how do we prioritize them? How do we apply them appropriately across, as you say, those dualities?
I view compliance and taxpayer services as two sides of the same coin. We need to be out chasing those who one way or other haven’t paid the right amount to get them to pay the right amount. But, on the other hand, if we can’t answer taxpayers’ questions, if they feel that they really can’t get the information they need, they’re likely to go to the low side of the equation or at some point it gets to be corrosive, and it gets to a point where people would say, well, maybe I’ll just take my chances as to whether they can find me at all.
So that Taxpayer Advocate had a good point that 98 percent of the money we get comes from normal filing season compliance; 2.0 percent comes from our compliance activities. Now, that 2 percent is $50 billion to $60 billion a year so it’s real money. But we have to be careful. And I’m concerned about that, with the low level of service we’re able to provide, that we don’t undermine their compliance by providing a really crummy taxpayer service. I think that’s the risk we’re now at.
And I think it’s important for people to understand that the level of taxpayer service isn’t because the employees aren’t working hard. I’ve now been to nine different cities, had town halls in each of those places. I’ve seen several thousand IRS employees. Their general issue is not their compensation or the fact that they’re working too hard. Their issue is that they’re concerned there aren’t enough people to allow them to provide the service that they think taxpayers deserve.
So I think the problem is if we say, well, okay, compliance is 98 percent related to taxpayer service, so we should do more in taxpayer service to get the numbers up. You could do that, but the amount of money you’re going to lose on the other side is much bigger. Compliance revenues we get by our own activities are four to five times the budget of the entire agency. So it’s a Hobson’s choice. Of the 10,000 employees we’re down over four years, 3,100 are revenue agents and revenue officers. So to some extent clearly compliance and enforcement is suffering. But at the same time our taxpayer services, as we put as much resources as we can into it, are not very good at all.
There was a question from one of the readers about the CP2000 notices and improving those. Is there going to be improvement in these kinds of notices? Is there a way to make those more understandable for both the taxpayer and the practitioners out there?
Koskinen: We’d love to do that. In fact, one of the reasons I’m out visiting all these sites is because I really strongly believe that the people on the frontlines in an organization [are] the employees know best what's going on and what the problems and challenges are.
Similarly, we get great feedback, and it’s important for us to get the feedback from preparers in issues like this. You know, in the last three or four years, we redesigned about 200 of the notices that go out. And so this kind of question is an important one. In fact, we get comments through the famous Web site, IRS.gov. And I’ve asked people to look into this one, but we’d be delighted to have comments from people or suggestions as to where they think the notices are troublesome or not correct in the way that they're framed because it’s in our interest as well as the taxpayers and the preparers to make sure that when people get a notice, it’s clear on its face, written in relatively simple language, that tells them what needs to be done next and doesn’t automatically, as the question said, suggest that the amount’s already been settled and agreed to and just send us a check.
That’s a good comment. If people have other suggestions or concerns about notices that go off, because they do, a lot of them go out automatically as part of the electronic process -- we've changed a couple of hundred, we’re happy to change some of those again, and we’re happy to change others if people have good suggestions for us.
One of our readers was curious: Do you think the IRS should be administering social welfare and other government programs? They're talking about the EITC, but also a lot of the aspects of the ACA, particularly given the resource constraints that the service is under at the moment.
Koskinen: Well, I've told the employees in some ways it’s an ironic situation. We are basically a tax administration/tax collection agency trying to provide information to taxpayers to make it as easy as possible for them to file their returns. So with all the background noise over the years and grumbling about the IRS, it’s ironic that when there is a new program, people oftentimes look to the IRS because they assume it’ll get done well and effectively. So we get --
If we were really not good at any of this, people would quit giving us the programs. EITC, for instance -- our overhead for running that program is about 1 percent. If you look at the normal social welfare program where people are qualified in advance and they go to offices and if you have lower rates of fraud, the overhead rates are about 20 percent. So one of the challenges we've had is to make sure, as we try to get better at eliminating improper payments, if we spend 20 percent of the program cost going almost door-to-door, while we could get improper payments down a lot, the question is would we be ahead of the game.
You know, EITC is still one of the biggest poverty programs in the government. We’ve paid out $63 billion last year and 20 percent of the people eligible didn’t apply.
We don’t have any control over it, obviously. Those decisions are made by Congress in the legislation. As I said, to some extent my view is for the employees, Congress keeps asking us to administer all of these refund programs, grant programs, programs out of the financial meltdown because in some sense we’re efficient about it, we don’t use up a lot of money in the overhead, and it’s a way to get the money out to the public effectively. But it does challenge us, as we’re going to be challenged with the backend of the Affordable Care Act, in a context where people say our budget’s have gone down by a billion dollars in four years and the workload’s gone up significantly.
We were talking about the social welfare programs just now in a different context, but that phrase, social welfare, has been coming up a lot in terms of the 501(c)(4) organizations. It seems like the IRS is kind of between a rock and a hard place on that with the lawmakers in Congress pressing you in one direction or in the other on that. How are you going to be able to come out with regulations that are going to be able to please like such divergent opinions, whether or not these groups should be tax-exempt and the ability to collect donations and then campaign effectively?
Koskinen: Well, it obviously becomes a much more visible challenge as people on both sides have become concerned about the draft. My position has been that the proposed regulations or draft regulations actually issued before my confirmation hearing -- just to make my hearing more interesting -- and it asked for comments on all the issues that people have now been publicly discussing. In fact, we have, at the last count, over 23,000 comments which I refer to as a new American record apparently for comments on any Treasury regulation.
My position is and my hope is that any final regulation - there's no guarantee that there will be one but any final regulation would be clear, would be fair to everybody, and would be easily administered. It’s a little like the social welfare programs you were talking about. We weren't set up to be and we shouldn’t be making complicated political judgments about campaign finance and other issues. There’s some push that we ought to withdraw the regulations. Some of us have said, well, it wasn’t really that unclear before.
But if you go back and look at it, a facts and circumstances test of what is not primarily a social welfare activity and how much of that you have to engage in -- the non-social welfare activity you have to engage in before you're at risk for your tax exemption is anything but a clear standard as far as I’m concerned. So I appreciate the concerns on both sides of the political spectrum. I think we need to take all of that. All of that has been reflected in the comments already. There will be a public hearing in which people, Congress and others can testify.
But I do think that it will be important to have clarity not just for the IRS, but the people running these organizations need to have a clear roadmap of what's acceptable and what's not so that we’re not making that decision after the fact, and so that they know how to run the organization on what they can do and how much of it they can do. And the decision needs to made about whether it applies just to (c)(4)s, or (c)(5)s, (c)(3)s, (c)(6)s.
So it’s complicated as an issue, but my commitment -- and I've told the Hill that my commitment is that any regulation that we come out with, my hope it will be, as I say, it’s going to be clear, it’s going to be fair. So maybe it’ll be everybody’s unhappy with it, but it will be fair. But, most importantly, it will be easily administered.
Then, as I've said, the Congress has the authority to pass any legislation they want or could just overrule any regulation we put out. The statute originally said you have to be exclusively’ a social welfare organization. So when the Eisenhower administration in 1959 said, well, that means primarily,’ it got us into this sticky wicket. So my sense is a way out of this is to try to have as clear a regulation as we can, that people running the organization can be comfortable, they know what they can do and can't do, and that it doesn’t infringe upon the ability of social welfare organizations, unions and others -- to whom it may apply - to function effectively.
Given the limited resources, do you see more of the taxpayer service or compliance responsibilities being shifted to tax preparers?
Koskinen: No. I think it’s an interesting question. Certainly, we don’t expect, as I said, [that] tax preparers to be in the compliance business, but there are two sides of the same coin -- to the extent we can continue the partnership we've always had with tax preparers in terms of sharing information and getting ideas from them about how to make things more understandable and easily responded to, our enforcement activities will be lowered, the better the returns are that we get and the more accurate they are. So to that extent, we have a great stake in the tax preparers helping us with compliance, but we don’t intend, I don’t think in any way, to have preparers become compliance enforcement agents for us.
In terms of taxpayer assistance, obviously a significant percentage of people use preparers to file their returns, and the vast majority of those preparers are educated and competent and experienced. So to the extent that we need to get information out to taxpayers, those that use preparers -- that’s a logical place for us to make sure the preparers understand what the answers are, [and] can get as much support from us and information as possible from us.
Again, it goes to the Web. We’re trying to provide as much information as we can on the Web. The Where’s My Refund app got 200 million hits last year. Now, that wasn’t 200 million different people because some people are probably checking every hour how their refund is doing. But, again, the preparers can be very helpful with us in terms of figuring out what information from their standpoint would be helpful for us to have easily available on the Web to their clients. If it’s good for their clients, it will be good for every taxpayer providing a return.
So I really do understand that the partnership we've had with preparers over the years is an important one, and it’s certainly equally, if not more important going forward.