by Roger Russell
Mark W. Everson was confirmed by the Senate on May 1, 2003, as Commissioner of Internal Revenue, becoming the 46th commissioner since the agency was created in 1862.
As commissioner, Everson presides over the continued reorganization and modernization of the nation’s tax administration agency, which currently has about 100,000 employees.
He brings to the office a rare mix of public and private service, including a stint as a CPA with Arthur Andersen & Co. in New York.
Everson recently reflected about his experience during his first year in office and the issues affecting the agency with Accounting Today senior editor Roger Russell.
Looking back a year, what notions did you have about your job when you started that proved to be off the mark, and which proved to be right on target?
Everson: I articulated three themes during the confirmation process. I praised the work done under Charles Rossotti in strengthening and improving service levels to taxpayers and the reorganization that was implemented around customer lines of business. I said we had a mixed grade on the modernization program because we were doing some things very well in terms of the increase in e-filing and some of the technical applications that practitioners and individual taxpayers could take advantage of, but we failed on some of the key big-ticket projects on modernization. The third thing I said is that we need to strengthen enforcement.
I’m convinced those are the right three themes: Keep working on the service side, fix the modernization but dramatically strengthen enforcement, all the time respecting taxpayer rights and everything that was written into law in 1998. My experience over the first year reinforced that judgment. What surprised me was the decrease in enforcement. I understood that enforcement was down, but I probably didn’t appreciate just how broadly the erosion in enforcement had taken place across all sorts of indicators for the agency over a period of time. We stepped in to arrest that not a moment too soon.
Have you found that your CPA training has helped in your position as commissioner?
Everson: I think that the training as an outside auditor was important, because what an auditor does is come in from the outside and gather information, some primary, some secondary, and put it all together and assess the facts, and assess the story that’s been written about the facts, meaning the financial statements.
That analytical training when you have less than 100 percent of the information — you never do as an auditor — is fundamental to any leadership or executive job because you’re always making decisions based on incomplete information. You have to work from the information you have or ask follow-up questions to get more information than you have.
You have stated that taxpayers should be notified if their data has been outsourced to a foreign jurisdiction. What are your thoughts on this?
Everson: We got a letter from a congressman asking us about the obligations for practitioners. While we concluded that we couldn’t compel people to use U.S. service providers, I commented that I felt that it was important that the practitioners disclose to taxpayers where the work was being done. I think people are entitled to know at a minimum whether they’re buying a U.S. product or a foreign product.
It looks as though some form of tax preparer registration — for preparers who are not CPAs, enrolled agents or attorneys — might be passed this year. Any thoughts on how the IRS will go about this?
Everson: It’s in one of the bills [before Congress] but not the others. I’m not sure what its prospects are, but I’m concerned because I wouldn’t want to see us be given responsibility to do something we couldn’t adequately implement. I don’t know if it will get passed or not, but it’s not something I’m clamoring for.
It would take a lot of resources to do it properly, because you’re talking about hundreds of thousands of preparers. Some of the provisions talk about testing and re-certification and that would be quite manpower-intensive unless there was a fee arrangement, but it would certainly be an expansion of responsibilities.
What do you consider to be an adequate audit rate for individuals and small businesses? Has there been a target rate set for the coming year?
Everson: We’re studying that now. We end up studying it based on the funding that we get so we adjust our targets up or down depending on what we have in the way of funding. I don’t have, at this stage, a finely defined target rate or ultimate audit rate. Clearly, the audit rates needs to continue to increase across a whole series of categories that were brought down so dramatically.
Ask me in a few years where I think it might optimally be. In the next couple of years we’re going to have plenty of opportunity to increase the rate. We’ll continue to focus our efforts on the high-end, the basic presumption being that Americans believe it’s important to work on that side because of the concept of fairness. Just because you have more money doesn’t mean you should be able to hire a more sophisticated practitioner to get you a better deal than the average guy.
Has the IRS won the war on tax shelters? Is there any ongoing tax shelter activity, or is most of your agency’s attention now focused on uncovering those who have taken inappropriate tax-shelter-based deductions in past years that are still open for audit?
Everson: That’s a complicated question. I think that we’ve gotten people’s attention, and I think that many of the participants are much more conservative in their view towards risk in this area. That having been said, I feel there’s a tendency for certain of these activities to drift down in the market space.
The larger blue chip companies may be more reticent to get involved in these aggressive transactions because of the adverse publicity and exposure, but there are people who continue to aggressively market those to some smaller and midsized businesses. That’s one reason why we’re continuing to increase our audit coverage there. Over a period of a couple of years we want to double the audit coverage for companies in the $10 million to $250 million dollar asset category, so we’re not going to give up on that. Likewise, we’re increasing the number of audits we’re doing on high-income individuals by over 50 percent.
We’ve won a series of court cases over the last couple of months on the need of the practitioners to disclose to us their transactions and the investors who got into these transactions. Whenever we win a big case I think it helps us. Does it mean we’ve won the battle? No, we’re not going so far as to declare victory, but I think we’re making some progress.
Do you think the court cases you referred to are the result of a misunderstanding or vagueness about the disclosure requirements?
Everson: No. I think they were driven by pure greed. The courts have totally rejected their purpose claim, considering it everything from frivolous to fraudulent. There has been a series of very strongly worded opinions that have totally vindicated the government’s position in this regard.
I think the reason they didn’t want to make these disclosures is because they were aware of just how shaky these products really were. Many of these individuals have concluded that they were misled by the firms and have engaged in civil litigation against the very people who sold them the shelters. We’re not done here, but I think we’re making accelerating progress and I think people know we’re serious so they’re thinking twice.
Are there any inefficiencies in operations you intend to focus on in the coming year?
Everson: We’ve worked a lot on the service side and we’ve been successful there. Where we need to work on our inefficiencies is more on the enforcement side, because we handle things a multiple of times and we take too long. I’ll give you an example: It takes almost two years before a corporate tax return or a return from a complex entity makes it into the hands of the examiner that does the audit. That’s not a recipe for prompt resolution of the issues, it’s something that doesn’t help the IRS track down emerging trends of abuses or problem issues, and it doesn’t help the compliant taxpayer who is well-served by getting these issues behind them.
We’re going to spend a lot of time streamlining the audit process. We need to focus our engineering efforts across all of our enforcement activities.
Reports vary on how many IRS personnel are up for retirement soon. Certainly, the number is high, even among key personnel who bring years of experience to the table. How do you propose replacing these individuals, especially those with technical tax knowledge that is difficult to duplicate?
Everson: I think it is a real issue. The problem is that the IRS hasn’t hired every year. Instead we have people that come and leave in spurts. Right now we have a group of very senior folks, who, as you say, are approaching retirement, and that can be an issue. We’re expecting a generous increase in the budget for 2005. We’re going to hire people, but we’re not only going to hire people at the low end, we’re actually going to hire from the outside as well, so I hope that would complement to a certain degree the issue of the great expertise of people going off.
It’s an issue, but at the same time, getting new people will enable us to get some new skills too. I think we can manage carefully through this, but it’s not something that happens automatically.
What are you doing to improve the major revamping of the IRS computer systems after a year?
Everson: Findings from a number of studies were that the IRS wasn’t involving its business people in the project. It was being handled by technical staff rather than people in the operating divisions who dealt with individual taxpayers or corporations or charitable entities. In my experience, that is not a successful recipe for a systems project — you need to have the business experts there to help you define the standards and protocols. So we made a decision that we would strengthen the relationship between the system staff and the operating staff.
Secondly, I already felt before I got here that we were taking on an awful lot — you can take on too much in this area. Very sophisticated projects, you can imagine updating the master files, and looking at too many things without enough manpower capability impeded progress. In the current fiscal year we’re spending $388 million. We’re bringing that number down to $285 million in the next year if Congress gives us all the money we’ve requested, so we’re trying to refocus our efforts into a smaller package, which in the long term we’re going to move faster.
The third thing we’re doing is to increase the accountability of CSC, the lead partner in this consortium. I meet with the president of the company once a month, and I think that has increased their accountability. Their performance is improving as we go forward. We’re not out of the woods yet — we have a couple of key deliverables later this year.
During the past year, have you changed your views on the functioning of the Office of Chief Counsel, especially with respect to the cases that are selected for litigation?
Everson: My views on the Office of Chief Counsel have been quite consistent. I think that it plays an important role in terms of the development of policy and guidance, but it also has to play a critical role in terms of supporting the exam and other issue selection functions of the IRS on the enforcement side. The Office of Chief Counsel takes a lot of credit on the good work that’s been done on shelters. They’ve been very good at coordinating with the Justice Department, and I’m pleased with the work they’ve been doing.
My concern has always been that, as you go about changing the IRS and trying to put speed into the culture, you can’t be successful unless you get the lawyers to come along with you and actually be an agent of change in the process. Otherwise they become something acting in sequence, not in parallel. I think we can make that change. Don Korp is going to be great in that role.
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