Tax Notes Talk

A Conversation with Former IRS Commissioner John Koskinen: Tax Administration

October 11, 2019 Tax Notes
Tax Notes Talk
A Conversation with Former IRS Commissioner John Koskinen: Tax Administration
Chapters
Tax Notes Talk
A Conversation with Former IRS Commissioner John Koskinen: Tax Administration
Oct 11, 2019
Tax Notes

In part 1 of an interview with former IRS Commissioner John Koskinen, Tax Notes Today senior reporter William Hoffman and Koskinen discuss IRS resources, enforcement, and taxpayer services.

For additional coverage, read these article in Tax Notes:


Show Notes Transcript

In part 1 of an interview with former IRS Commissioner John Koskinen, Tax Notes Today senior reporter William Hoffman and Koskinen discuss IRS resources, enforcement, and taxpayer services.

For additional coverage, read these article in Tax Notes:


David Stewart:

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: checking in with the former commissioner. I'm joined in the studio by Tax Notes senior reporter William Hoffman. Bill, welcome back to the podcast.

William Hoffman:

Hi, Dave.

David Stewart:

So, tell me about the interview you just did.

William Hoffman:

Well, we had the better part of an hour with former commissioner John Koskinen and we talked about a wide variety of subjects, including controversy over the IRS's seemingly increased audits of low-income taxpayers, the turn of IRS apparently towards more enforcement -- if not necessarily yet fewer taxpayers services -- the decision by the Office of Professional Responsibility to hand over alleged violations of circular 232 non-attorneys who will now have the ability potentially to take a practitioner's practice before the IRS away. Also about stolen identity refund fraud, and wound it up with some interesting observations about President Trump's tax returns.

Speaker 1:

All right. Well since Commissioner Koskinen was so generous with his time, we've decided to split this episode into two parts and we'll be posting part two next week. Let's go to that interview.

Speaker 3:

[inaudible]

William Hoffman:

Welcome, Commissioner John Koskinen. Thank you for joining us today for a wide-ranging discussion on topics of current interest to the tax profession. For our listeners, John Koskinen served as IRS commissioner from December 2013 to November 2017 after a decades-long career as a turnaround specialist for The Palmieri Company. Mr. Koskinen also served as the nonexecutive chairman of Freddie Mac during the 2008 financial crisis and afterwards, and as chair of the Y2K Commission that helped keep our computer systems from melting down at the turn of the century. He is a devoted soccer and tennis fan and has a stadium named after him at Duke University. Welcome, Commissioner Koskinen.

John Koskinen:

Delighted to be here.

William Hoffman:

You've been out of the IRS coming up on two years now. For those of our listeners who don't still have a daily Google news alert titled "John Koskinen" on their phones, tell us what you've been up to these days.

John Koskinen:

Well, I actually have seen a lot more of my family and my grandchildren. I'm now on an advisory group at my law school Yale and also down at Duke University. I've just agreed to go on the board of the National Academy of Public Administration and I'm helping a small startup. So I have a number of things. It's amazing how busy you can get, not even realizing that you're signing up for things.

William Hoffman:

Are you working in any of these areas in tax?

John Koskinen:

No. The closest is this small startup called Harness Wealth, which is designed to allow people online to be able to select from pre-screened advisors, investment advisors, tax accountants, tax lawyers and others.

William Hoffman:

Okay. Well on September 26 the Treasury inspector general for tax administration told a congressional subcommittee that the IRS audits low-income taxpayers more often because it doesn't have the resources for more expensive and complex investigations. That official also said that the IRS wasn't targeting poor people per se, only the Earned Income Tax Credit program whose demographics track closely with lower income working people. Does that reason work for you? Would you have allocated scarce resources to keep collections up even if the effect, if not the intention, was to squeeze lower income taxpayers?

John Koskinen:

Well, I think you have to look at that report carefully and the data behind it and the IRS has always made sure that it audited people across the income spectrum and in fact, people are at the highest level of get audited more than almost anybody. But when you look across the spectrum, as the enforcement resources have dwindled, there has been a continued focus on the Earned Income Tax Credit because of the rate of improper payments. The improper payment rate has always been in the 20 percent level and as much as a $12 or $14 billion a year is going in probably in proper amounts, not necessarily to the wrong people, but it's such a complicated statute that even people trying to complete the returns accurately and their preparers have trouble figuring out who gets credit for having taken care of the children. So there has always been, even when there were more enforcement resources, a focus on the Earned Income Tax Credit program, trying to get the improper payment rate down. So it's not because they're poor, it's because that's a program everybody loves, but it's impossible to deal with effectively. I always thought what you needed to do was change the statute and make it simpler for taxpayers and their preparers and the IRS to figure out who actually gets credit for taking care of the child.

William Hoffman:

Understood the statistics argue in favor of the balanced interpretation that you're talking about. But at the same time, the raw effect of this is hundreds of thousands, if not millions, of low-income people who because they left off a number on their tax return or didn't attach the proper paper to back up a claim that was might otherwise well have been legitimate, are being fed into a system where they are targeted more or less by the IRS for these improper payments that may not be their responsibility at all. And you are talking about masses of taxpayers. So does the IRS have any responsibility to relieve that burden, short of the Congress acting to reform the EITC?

John Koskinen:

Well, we spent a lot of time. First, it's an interesting program because the IRS on the one hand has an obligation to make sure that everybody who's eligible to participate in that program does. So in January of every year we ran programs all around the country trying to make sure people understood if they were eligible, they make sure they would apply. So on the one hand you're trying to get everybody in. Usually the estimate was of only about 80 percent of the eligible people actually file the return and then on the other hand, in this complicated statute, you're trying to make sure that the returns are accurate. So there were attempts to make sure the preparers understood exactly how the calculation went to try to ensure that people filing did it well. A lot of times in the cases you cite there, where it's a missing number or a page, those are oftentimes what are called paper audits. You'll get a letter from the IRS and you can correct the mistake by a response back, but it is a program we made a lot of progress in a lot of ways while I was there. The one area we were not able to make significant progress in was lowering the improper payment rate in the Earned Income Tax Credit. We ran a seminar one day for a couple of days with everybody who had an interest in this -- the GAO, the Congress, advocates on both sides -- to try to collect everybody's best ideas and when the dust settled, it seemed to me the bottom line was you just had to simplify the statute. I've read the statute and it's hard for me to understand exactly how it all works and it seems to me, you ought to have a simple rule. My thought was something like whoever has custody and is taking care of the child on December 31st gets the credit and the family can work out whether grandmothers, aunts, uncles, putting in more than their fair share.

William Hoffman:

The current commissioner, Charles Rettig, has made clear that he regards both civil and criminal tax law enforcement as an important part of overall compliance. How can the IRS substantially turn towards enforcement and not away from taxpayer services if the agency's resources remain in the $11.4 billion to $12 billion range that Congress is currently negotiating?

John Koskinen:

Well, you can always try to be more efficient, but ultimately you can't do it. In other words, the IRS basically has funding for taxpayer service, enforcement, information technology, and if you want to increase one without increasing the overall resources for the IRS, you have no choice but to decrease the effort in other areas. At times, it's come at the expense of information technology. At times, it's come at the expense of not being able to do more in taxpayer service, but my point for the four years was if you continue to underfund the IRS, you're going to end up doing less with less. You can't do more with less forever.

William Hoffman:

What, if anything, does the elevation of the IRS Criminal Investigation Division's deputy chief Eric Hylton to lead the Small Business and Self Employed divisions signal to taxpayers and tax professionals about the IRS's enforcement strategy?

John Koskinen:

Well, I'm not sure it signals anything. Eric's a very talented executive. The IRS has a great history of developing executives by moving them around and in fact, one of the goals we had was to make sure that we broke down the silos in the IRS as much as possible. So we didn't have people who only did work in wage and investment for their entire career or small business or criminal investigations. So if you look at their resumes of middle managers and senior managers in the IRS, you'll see that they moved from place to place. They've gone to the taxpayer advocate, they've been in chief counsel, they've been in appeals. So I think Eric is a very talented executive. I think he'll do a great job at SBSE. I don't think his movement there by itself means that suddenly there's going to be a different kind of enforcement at SBSE. Enforcement there and the collection activities will continue. I think his biggest challenge will be making sure he's got enough revenue agents and revenue offers to make the system work effectively.

William Hoffman:

You worked with Mr. Hylton when you were at IRS?

John Koskinen:

Yes.

William Hoffman:

Can you tell us a little bit about him? His work habits, his personality.

John Koskinen:

Well as I said, the IRS historically has had really an outstanding program for taking people from frontline managers on and training them regularly, moving them, giving them broad-based experience and having the best people rise to the top. So there's a history of very strong career people being the deputy commissioners if both for service and enforcement and operations, but also the division commissioners historically have been very talented and very good and Eric fits that mold. He's moved effectively through different management and executive responsibilities. He's got a very pleasant personality. He's easy to get along with. He's fun to talk with, so I think he'll be a good leader for the employees in SBSE and I think he's very organized, very disciplined and I think that it will SBSE has a history of good managers and good leaders and I think Eric fits that mold. I don't see a significant change. I think that it'll continue to be a well-run division.

William Hoffman:

The IRS plans to phase out all attorney positions from the Office of Professional Responsibility and replace them with non-attorneys who would then be tasked with analyzing alleged violations of circular 230 and negotiating appropriate sanctions for practitioner misconduct. Does it make sense to give non-lawyers the authority to take away a practitioner's ability to practice before the IRS? Are there risks in this strategy for tax professionals and the taxpayers they serve?

John Koskinen:

Well, again, this is a decision made since I've been there. Going forward, I think again, the people being put into those positions are very experienced and have been with the agency for some time. So it's not as if there are new people just sort of started not being told, "OK, go audit practitioners." And there's a long history of the standards of performance that are being reviewed and enforced. So I think as a general matter, there's a framework with experienced executives and personnel and a framework for activity that means that you're not, again, going to see a major shift. But I understand the issue that people have raised that you know, it helps if you've been trained and as a lawyer and practiced as a lawyer if you're going to be reviewing practitioners, particularly lawyers. A lot of practitioners in that are preparers who themselves are not lawyers. So to that extent you may end up, you could argue, with people who are more understanding of what it's like to be a non-lawyer as a practitioner. But you know, I haven't had discussions with people about exactly which way it's going to work. But again, the practitioner community is very well organized and I think over the next year or two, we'll get feedback and we'll see what, if any changes, have happened, whether this is more efficient, whether the practitioners actually are more comfortable with people who will come at it with less of a litigation, legal aspect and more of an operational aspect in terms of how they performed. So I think I'd wait and see over the next year or two what the feedback is is to how the operation really works.

William Hoffman:

Could the new OPR directive serve as the basis for a lawsuit by practitioners challenging the decision?

Speaker 3:

Off top of my head, I don't think so. I don't know what your claim is as a practitioner as to your ability to select the kind of people reviewing your work or making changes in that work. You cannot obviously object to the findings and the recommendations, the activity, the sanctions, but I'm not sure that as a general matter you can object to the structure in the organization of the system and the people who are operating in it. You may have a complaint about a particular individual, but I don't see a cause of action here that while they've got a different kind of people with different backgrounds doing the work now than they used to have.

William Hoffman:

The IRS has made great strides against stolen identity refund fraud, in good part due to your efforts and the efforts you mobilized at the IRS. Crime continues to morph into new forms, though, and taxpayers and the IRS remain at risk. Do you think there will eventually be a way to permanently secure the system -- taxpayers, tax professionals, and the IRS -- from refund and identity fraud? And is there an eventual solution more likely to come from inside the tax system or from outside of it?

John Koskinen:

Well, you would like to think that someday down the road, the system will be totally secure. As you know, the number of victims of identity theft has dropped by over 70 percent since we put the security summit together harnessing the experience and energy of the private sector in partnership with the IRS, but that still leaves a reasonable number of taxpayers still victims of identity theft and false refunds every year. A number of things will help. People have moved in the financial industries to multifactor authentication so that if you want to do anything very interesting with your bank account or with your investment account online, a lot of times you'll get, most times in fact, you'll get a code sent to your either your email or to your cell phone to verify who you are. Oftentimes even beyond that, you'll get other queries and they will also monitor the system you're using, so if you are at a different computer or they don't recognize the computer, they'll again do more certification. The IRS is moving in that direction, hampered to some extent because it doesn't have email addresses for all taxpayers and it doesn't have a cell phone numbers for all taxpayers. But to the extent you can use that multifactor authentication, I think that's the most significant step forward. And now the challenge is, I always thought if you could make it increasingly difficult for criminals to be successful hacking into the IRS system, for the IRS, the success would be they'd go somewhere else where it was easier. And in fact, our concern early on with security summit was as the IRS got better, the logical next place criminals would go would be preparers because if they get access to your account with your preparer, there's even more information than the IRS has. There's bank account information, other information. And sure enough, shortly after we started having success, we got reports from preparers that their accounts were being hacked. And again, the joy of the partnership was, our arrangement was if the preparers would give us the names and Social Security numbers of their clients, we could freeze those and protect them as we went forward. And then we could spend a lot of time with the preparers and companies trying to encourage preparers to take more safeguards to make sure they had virus protection and make sure they weren't subject to phishing expeditions. The next thing that happens as you recall was suddenly there were phishing expeditions in companies where what it looked like was the CEO is asking for information about the employees -- names, identification, Social Security numbers. All that information was going to, I used to say Belarus or Russia or to the criminals. So I think the important thing for people to understand is A) the IRS and preparers take this challenge seriously. But B) you should never assume that you're totally secure. And in fact one of the programs the IRS has had for some time is monitoring its systems on the assumption somebody has gotten into the system and can you internally then monitor and close things off on the assumption. Even though you think your firewalls are secure, you have to assume that at some point somebody's going to figure out how to get in and you want to be able to catch them rather than just assume that you have no problems. So I think all of us are well advised to be security conscious and even more so as more and more information is available to people around the world.

William Hoffman:

That kind of leads to a question about cryptocurrencies and blockchain. The IRS dropped some FAQ and some guidance on cryptocurrencies. I'm not going to ask you about that directly, but I'm curious. Do you think that blockchain has a future in securing against identity and refund fraud?

John Koskinen:

Well, it certainly has the possibility to do that. Again, my point is for every step forward and now there's this challenge and as you move into these areas, it's the same issue. You will have more security, you'll be able to authenticate more effectively. But on the other hand, you should never assume that these very well-funded, talented criminals out there aren't doing the same thing you're doing while you're trying to be more secure, they're trying to make you less secure. And so I think that that's a little like our experience where when you're push down here, it comes up over there. We got better, so suddenly they're going after preparers and if they're not going after preparers, they're going after companies all designed again to circle back through to get false refunds paid. So I think the blockchain technology has a lot of promise. As you know, law enforcement officials and others are concerned because it is so potentially secure that they won't be able to get in and they're already having that trouble with some systems. But I do think that increasingly what probably ultimately is going to work best is that people will be better educated and more aware of the security risks. So they'll fall less prey to phishing items. You know, these emails look very official and they have websites that look very official. You just have to look carefully at the URL. But pretty soon they'll get better at masking the URL, so I think no matter what the systems are it will ultimately total protection depend upon every individual thinking twice before they take particular action.

William Hoffman:

You spoke numerous times before you left the IRS about the need for more tax agency recruitment and for better retention strategies for the employees already there. Can you see the IRS making progress now that will make a difference in this later? Could the IRS face a recruitment or retention crisis of the moment similar to the 2019 Tax Day outage? Or is the problem more likely to show up in subtler ways that are harder to identify and treat with the seriousness the problem deserves?

John Koskinen:

My temptation is to say all of the above. Basically, my concern was and still is as you cut the IRS budget and then keep it low and don't even allow for pay increases and others. If the budget is fixed or it's cut now what you're going to end up doing is in effect not replacing people when they leave and that's how when I started there were 100,000 employees. Now there are give or take a little 75,000. There are probably a 10 to 12 million more taxpayers now than there were at the start of 2010 so what you've got is a situation where, and you look at the demographics of the IRS, and you've got a very small percentage of people under 30 or under 35 and what I used to refer to it as the baby bust. So you don't replace people when they leave. So you're not hiring new people in sufficient numbers because of the budget crunch. And my concern is you're going to wake up in five or 10 years and look for your next generation of first-line managers and middle-level executives and there isn't going to be anybody there and it's not something you can replace overnight. If you haven't hired entry level people in any significant number for five, six, eight years, you can't hire them all on one year. And so I think there is a real risk that the cadre of available experienced managers is declining as you're not hiring enough young people and entry level people and training them as you go forward. And while it's better to have your budget stable than cut, even if it's stable, you're absorbing, you know, anywhere from $50 to $200 million a year in additional expenses. And the only way you absorb that is by having fewer people. Now you can work to become more efficient and we tried a lot of different things -- making sure you don't have too much office space, you're monitoring a paper processing systems, et cetera. And you need to do that, but ultimately not having enough people is in fact going to be a problem. Now on the other hand, in addition to that, going back to my buckets, you've got taxpayer service and enforcement and you've got information technology. And so my concern about the information technology, and there's good roadmap for continuing to modernize it, is if you underfund that. And a lot of times if you look at what happens is people say, "Well, we're going to do more enforcement. We'll hire more agents." And then you say, "Where's the money coming from?" And oftentimes it's coming out of IT modernization. In one year it was cut by over $100 million and you can, again, you get away with that for a year or two. And while that stoppage, previous filing season was a relatively new piece of equipment, when you're running antiquated software and hardware that's two or three generations out of date, you're just asking for trouble. And again, it's one of those things, if the systems aren't modernized, aren't kept current, when you have the shutdown, it's not something you necessarily are going to be able to fix in 12 hours. So I think that all of this is why my hope was as all the issues from six years ago about the so-called targeting of conservative groups, which turned out to be targeting of everybody wanting to be tax exempt faded as you had a new commissioner, part of this administration that you'd get more support and understanding on the Hill that funding the IRS is good business. Nobody has ever disagreed, even at the height of the attacks on the IRS, that if you give the IRS a dollar, you'll get $4 to $8 in return.

William Hoffman:

Does it seem like Congress is getting that message now?

John Koskinen:

Well, I think there's this increased recognition. Nobody's talking about cutting the budget. The House proposed a significant increase. It would've gotten you back close to where you were in 2010. The Senate has disagreed and as you noted, sort of argue while we should more or less stay where we are, which is, you know, several hundred million dollars below where we were in effect 10 years ago since as the 2020 budget. But the dialogue is better. There's less attack on the IRS, more focus if you're not going to fund, well you need to be efficient. And I think everybody would agree you need to be as efficient as you can, but there's no way to deny if you step back and look at what the funding was 10 years ago, you would say, "Well, gee, if you can't even have the same level of funding with significantly increased numbers of taxpayers and challenges, something's gotta give."

David Stewart:

OK, so that's it for part one. Bill, what can listeners look forward to in part two?

William Hoffman:

Well, we got some interesting feedback on the recent media reports about a potential whistleblower inside the IRS alleging misconduct regarding the president's tax return audits. I also asked the commissioner's opinions about President Trump as a tax president. You may know that Commissioner Koskinen actually has a long business history with the Trump family going back to the original Continental Hotel deal in the 1970s. I also asked about his opinion on presidential tax returns in general. Should they be open to public inspection? And then finally what Mr. Koskinen would have done if he had gotten the subpoena and been asked to turn over President Obama's tax returns.

David Stewart:

All right, and make sure you're subscribed to this podcast so you'll get that next week. Thank you, Bill.

William Hoffman:

Thank you.

David Stewart:

And now, coming attractions. Each week we preview commentary that'll be appearing in the Tax Notes magazines. I'm joined by Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?

Jasper Smith:

In Tax Notes Federal, Ted Stotzer argues that some cryptocurrencies may meet the conditions for treatment as currency for federal income tax purposes. Dan Palmon and Jay Soled consider how Congress could impose an additional value tax on publicly traded corporations. In Tax Notes State, Robert Plattner discusses the MTC work group and its recommendation that marketplace facilitators should be solely responsible for collection on its platform. Rick Handel considers when third parties should be held responsible for a business's unpaid taxes. And in Tax Notes International, Oliver Hoor examines the European Commission's state aid investigation into tax rulings that Luxembourg granted to a food packaging company. And Koen van ’t Hek and Terri Grosselin examine Mexican tax proposals targeting BEPS and the digital economy. Finally in our Opinions page, Bob Goulder examines one taxpayer's efforts to fund her FATCA-related litigation expenses through crowdsourcing while Carrie Elliott discusses tax evasion and the fraud triangle.

David Stewart:

You can read all that and a lot more in the October 14th editions of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.