Eric Hylton: The New IRS Chief of Small Business

David Stewart:   0:01
Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: the enforcer at Small Business. Tax Notes legal reporter Nathan Richman sat down with Eric Hylton in his office. Hylton is the head of the Small Business/Self-Employed Division at the IRS. Nate, welcome back to the studio.  

Nathan Richman:   0:23
Thanks for having me.  

David Stewart:   0:24
For those who may not know what is Hilton's role as SB/SE commissioner?

Nathan Richman:   0:28
So Hylton is the head of the business operating division at the IRS with jurisdiction over about 57 million taxpayers, including the self-employed and businesses with assets under $10 million, plus employment, excise, and gift and estate tax returns.  

David Stewart:   0:43
So what did you talk about?  

Nathan Richman:   0:45
We discussed employment tax and high-income nonfiler visits, fraud referrals, and SB/SE's use of data analytics.  

David Stewart:   0:52
Alright, let's go to that interview.  

Nathan Richman:   0:53
We're here with SB/SE Commissioner Eric Hylton. Thank you very much for joining us.

Eric Hylton:   0:59
Thank you, Nathan. I appreciate it.

Nathan Richman:   1:01
Well, let's just get started. How are you settling into your new role after a long time at CI?

Eric Hylton:   1:06
Actually, it's been great. It's been approximately six months since I've taken over the position as SB/SE commissioner. It's been an exciting journey. I want to thank the commissioner for giving me this opportunity. I spent the last 26 years within the Criminal Investigation and the last position being the deputy chief for CI and overseeing major tax fraud investigations, international corruption, cybercrime, terrorist financing, money laundering, so there was a lot of opportunities there. And so I felt really fortunate that the commissioner asked me to come over and be the SB/SE commissioner. It's the first time in history that a deputy chief for CI has come over to be the commissioner for one of the major bodies, so I feel very fortunate. And it's been six months. A lot of great people here within SB/SE. Excellent skillset, seasoned professionals. I'm truly pleased at the opportunity to lead this great organization.

Nathan Richman:   2:04
A few more people to keep track of, though.

Eric Hylton:   2:06
In CI, we had about 3,000. I have 20,000 here. I affectionately used to call the CI workforce the mighty 3,000, so I have to say the enormous 20,000 here, but it is a great team. Great team.

Nathan Richman:   2:20
So what's the biggest difference you're seeing now that you're on the civil side rather than the criminal side?

Eric Hylton:   2:25
Well, my coming over to the civil side, one of the main purposes is bringing more of a laser-focus effort as to the enforcement initiatives and strategies. I bring also an opportunity to even bridge to the gap between CI and the other operating divisions. The biggest factor I see is the portfolio for SB/SE. I mean, it's huge. When I think about 57 million taxpayers and so SB/SE is responsible for all of the collection activity -- employment tax, corporations under $10 million, excise tax, Bank Secrecy Act. There's a number of activities within collecting, just auditing for examination.  So when I look at the huge responsibility that SB/SE has, and many times when you're thinking about the IRS, you think about SB/SE and that face-to-face interaction. So it's been a great opportunity learning a great deal, going back to the SB/SE mission and thinking about that mission. And so we're here really to help taxpayers understand their tax obligation. But also, we're here to help taxpayers meet their tax obligation. So if you think about that scales of justice there, we're there for service as well enforcement, so kind of bring both of those aspects to SB/SE.

Nathan Richman:   3:45
You mentioned employment tax. I've been hearing about employment tax from the DOJ, CI, and various parts of SB/SE for several years now. What's new in employment tax? 

Eric Hylton:   3:56
I'll start off here by asking you a question to that question. What's your favorite number?

Nathan Richman:   4:01
42.

Eric Hylton:   4:02
42. So I say your favorite numbers should be 95 or 96 because the IRS is responsible for collecting 95 or 96 percent of all the revenue for this country. And I think we look at that responsibility and recognize the importance of the IRS for the country. And so I like to highlight that fact and thinking of that. When you reference employment tax, 72 percent of that is employment tax. So what is new? 

Eric Hylton:   4:30
The major factor that is new is our revenue officer compliance visits and what we're looking at. And looking at those factors and visiting and using data analytics and developing heat maps into our underserved geographical communities in which we have a group of revenue officers come together and go to a particular city in which we have individuals who are late in filing their employment tax or paying their employment tax. It's been hugely successful. The key factor I think with that is we communicate. We publicize to the local media, national media that we're going to that particular state.  So we've been to Texas, Wisconsin, Arkansas, which we have some areas within those particular states where we have limited visibility. So it's been hugely successful. It's a huge deterrent message because you don't know if we're coming to knock on your door or your neighbor's door. So it's a truly important and it's a new initiative for us. So that's one of the major factors that's new.

Nathan Richman:   5:35
Where you going next?

Eric Hylton:   5:36
Still working on that. Still working on what's next, but we will let you know in advance where we're going next.

Nathan Richman:   6:36
Well, visits have been publicized very recently in another area as well. You're visiting high-income nonfilers. Tell me about that.

Eric Hylton:   6:44
So here again I'll make a quick point that I should have made on the employment tax area. When we look at employment tax, $81 billion represents the tax cap for employment tax. And so I wanted to make that point there, so it's obviously a strong priority for us. High-income nonfilers is another important point. We look at $31 billion associated with nonfilers. So here again it is an important priority for us. With using the same methodology that we use regarding the revenue officers' compliance visits, we're looking at high-income nonfilers, individuals who are making over $100,000 and have not filed. We use data analytics and using a heat map as well for that to visit taxpayers across the country. We've received quite a bit of publicity associated with that, which we're pleased to, because part of the thought is for taxpayers to come in and pay their taxes that are due. There's a number of options that we have on irs.gov that gives the opportunity for taxpayers that are unable to pay the balance in full. So this is just a great opportunity for us to reflect that no matter what income level you're at, the IRS will be addressing that noncompliance issue.  

Nathan Richman:   8:06
So you've mentioned heat maps a couple of times. Can you explain that for our audience?

Eric Hylton:   8:09
So heat maps, what you have is as you look at the data analytics and it tells you where we should concentrate our efforts. Whether it's from an employment tax standpoint or a high-end nonfiler standpoint, it will give you an area in which we have a high concentration of those individuals, and so that allows us to be a lot more efficient with our time and efforts with our resources. It's a great opportunity for us. And speaking of data analytics, looking at that and that allows us an opportunity to use our enforcement tools in a very efficient manner.

Nathan Richman:   8:42
So both this and the employment tax uses -- and we'll get to this later, some of the easement and microcaptive initiatives, especially the microcaptive -- they sound quite a bit like some of LB&I's campaigns. Is that the same sort of process you're going about? Or were those campaigns sort of a comparator or a previous bit of experience to draw upon for these sorts of initiatives?

Eric Hylton:   9:07
I'll start here. One of the cornerstones of our overall compliance strategy for SB/SE is communication. Everything that we are doing, we want to be as transparent as possible. We want the public to know that we are addressing nonfilers. We are addressing employment taxes. We are addressing microcaptive insurance. We are addressing syndicated easements, various issues that we have. When I was appointed to this position, one of the major priorities that I had is that we will try to communicate as much as possible. I bring that, I think, expertise from CI as well and bringing that to SB/SE because here again, as I speak about the skill set of SB/SE employees, the seasoned employees, they're doing fabulous work. And I want the American public to know the work that SB/SE is doing. But also recognizing the fact that we are doing services as well as enforcement.

Nathan Richman:   10:02
So, we've discussed four programs. Any others that you want to highlight, or perhaps anything coming soon?

Eric Hylton:   10:08
We have quite a few things coming soon, but I'll leave you with that teaser.  

Eric Hylton:   10:13
So I'm a big fan of teasers. But I could use a little more information. When should I be looking out for these?

Eric Hylton:   10:20
We should be making some announcements within the next two weeks on a new area that we want to focus on. Some of the things that we talked about, but a little bit more of an emphasis.

Nathan Richman:   10:31
You mentioned earlier bridging the gap between SB/SE and CI, and civil and CI in general, as well as the communication issue. One area that connects civil side and criminal side is the National Fraud Program. That's the group within SB/SE that reviews potential fraud cases and directs them where they need to go. We haven't heard too much about changes to that program since I think I last heard about it in the summer of 2018. Do you have any update on that program?

Eric Hylton:   10:59
I'll start off by saying this. I think it is critically important that we have a robust and visible enforcement strategy, and I will lean back towards the mission again of SB/SE, and that we're here to help taxpayers understand their tax obligation as well as meet it. Fraud is just one part of that overall conversation. That overall discourse is an important aspect of that. So one of the things that I, in conjunction with the Commissioner, have launched a new initiative called Unlocking Fraud. You are the key. And this was an initiative for all of our employees in which we started off with a video to every compliance employee, expressing our support for fraud development, fraud detection. I think that's been hugely successful. We have increased a number of our fraud awareness activities. One aspect that has changed is that we're looking to have our younger or less experienced employees received fraud training a lot earlier in their training so that they can help identify the various badges of fraud quickly, whether is the first indications of fraud or firm indications of fraud. So I think those are important aspects. But we're also looking at a number of just maybe potentially operational barriers that may be in play for us to identify fraud. It is hugely an important area, not only for the service as a whole. I'll leave you with another teaser that we have an announcement coming soon, that's going to also impact and reflect what we're doing differently as it relates to fraud.

Nathan Richman:   12:45
This seems like an obvious point. What particular lessons from CI on the receiving end of fraud referrals: how to find potential referrals now that you're on the civil side?

Eric Hylton:   12:55
Great question. I think the first part is increased communication. Increased communication with the civil functions as well as with CI on just what makes a good case. So we're having a session in a few weeks to think like a criminal with our civil and criminal aspects and just generically talk about the different aspects of fraud. So that's going to be one of the first things that we do.

Eric Hylton:   13:26
The second, I think what I recognize is the fact that really increase the educational components of what fraud is for our civil employees. But the bigger factor that I want to emphasize is we're looking at criminal fraud, but we're also looking at civil fraud. I think that sometimes gets lost in the conversation. It is an important factor. You think about civil fraud and ensuring that we pursue that when that's appropriate as well. It makes me go back to our statement because overall thinking about SB/SE, I look at it and I talk about being a robust and visible enforcement strategy. But we think about appropriate enforcement is true customer service for the customers that are doing it correctly. So we really want to emphasize that.

Nathan Richman:   14:18
As a result of any of the changes that have gone on so far, have you seen any sorts of different results? I checked the most recent CI annual report, and we're still at that 7 percent, though of course, it's rather recent. Any changes for that?

Eric Hylton:   14:33
It takes time. I think we at this point don't have any figures to provide to you, but recognizing that we are making incremental changes, which is going to take time to see the results. But we will see some changes.

Nathan Richman:   14:45
You've mentioned data analytics a couple of times, and when I knew you in your prior position, you mentioned it a whole lot more. Does SB/SE have any of its own special programs the way CI used to? Or is most of this partnership with the data division?

Eric Hylton:   15:02
So I would be remiss to say that SB/SE's data analytics capability-- it's just as good as CI's, I would say. And I expressed to the commissioner before that I was tremendously impressed with the activity that SB/SE is involved in in their research office. Obviously, we want to use data analytics to become a lot more efficient with our enforcement tools. We are looking at it from a number of different perspectives. So I'll start off with our return preparer program. Using data analytics to do risk analysis as to the most egregious return preparers that we have. We have really a strong formula and algorithms to use and model there. But what is key to that factor is not only are we identifying return preparers that are egregious in filing bad returns for individuals, but they're also looking at him and seeing if they're identifying and reflecting whether they have filed returns. So there's another connection there because those are excellent cases for criminal investigation because you have an individual who was filing bad returns for individuals as well as for themselves and have not filed. So that's an important point. So we're using that there. We're also looking at the gig economy as well and using data analytics to look at whether it's from a nonfiling, underreporting, those factors, and maybe potentially sending out some soft notices to individuals to reflect their filing requirements as it relates to the gig economy, which is obviously an emerging area for us. So those are a couple of areas that we're looking at. Obviously I can express we're heavy into the nonfiler initiative and using data analytics in that area as well.

Nathan Richman:   16:49
We've, a couple of times, touched on microcaptive insurance. What is SB/SE doing in this area?

Eric Hylton:   16:56
I will start off: by working very closely with our partners in Large Business and International as it relates to microcaptive. There's a lot of conversation and a lot of presentations that we've done on microcaptives. But I'll touch on a couple of topics related to microcaptive. So in starting with microcaptive, in September, we started a program for individuals who could come in and settle their limited time settlement, and 200 or so taxpayers associated with that, so that is moving along pretty smoothly. Also, the other factor, I would say, is that when you look at abusive schemes, I think we've talked a lot about microcaptive and talked about syndicated conservation easements. The point that I want to emphasize there, if it sounds too good to be true, then it is. For microcaptive, the courts, we've had three court rulings that reflected that many of these abusive microcaptive transactions, it was not insurance. So taxpayers should go to an independent advisor to really look at those transactions. But the key factor in both of those abusive transactions, I believe are promoters. Promoters who are advertising these abusive schemes, and some are reflecting that you could get three, four, five times your investment. And I would ask many taxpayers, and I would express to many practitioners that listen to your show, does that sound correct? I'll flip into syndicated conservation easements as well. We have seen appraisers who have praised property and have the property has gone up 2,000 percent. So you ask yourself the question, and I say my CI spidey sense goes off, in a sense that that seems like a potential fraudulent activity. Obviously another area that I'm looking at and thinking on those are some cases that should go over to CI for fraud referral.

Nathan Richman:   18:55
You've given one example of an interesting, egregious fact pattern for conservation easements. Understanding that you probably can't say anything specific, any other interesting, egregious facts you've seen?

Eric Hylton:   19:06
Another pretty egregious fact that was used, there was a taxpayer that thought the property had dismounted his view, or different things of that nature. So then you had a drone to oversee and look at that and just shows that it was flat land. So therefore you have an inflated appraisal. So those are just situations that taxpayers should understand, very similar to what we say during this year for filing season. There's red flags that individuals should watch out for as far as promoters, return preparers. Like I said before, if it sounds too good to be true, then it is.

Nathan Richman:   19:47
Other than this red flags to look for, do you have any other comment for somebody who is looking for good versions of these transactions? What to look out for so that they can feel comfortable that they're not inching towards something that might be fraudulent?

Eric Hylton:   20:02
I would first say taxpayers should do their homework. There is plenty of legitimate microcaptive insurance activity there. I mean, right off hand, I think about the farming industry. I think that's been appropriately used. But, and I speak from my CI days. Well, you have tax law, and there are individuals who will try to abuse it. And so I probably would express to taxpayers to do their homework and continually do their due diligence.

Nathan Richman:   20:32
You've mentioned some, and mentioned before, the idea that there are some good fraud referrals here potentially. Have you found any yet?

Eric Hylton:   20:40
We're always pursuing fraud referrals. It's part of the overall conversation, and when appropriate, I think it is some that we have. But what I want individuals to understand is only when we're going to send fraud referrals when it's appropriate. But it should be a part of the conversation, not the conversation. So, yes, we have seen some, and we're pleased about that. We continue to see some.

Nathan Richman:   21:07
So in 18 to 24 months, we might be seeing some indictments?

Eric Hylton:   21:12
We only hope.

Nathan Richman:   21:14
Have you had any conversations with Brendan O'Dell, the scheme czar, for want of a better word, yet?

Eric Hylton:   21:20
No, I haven't. But I plan on meeting with him very soon. I think it's an excellent opportunity for the service to look at promoters as a whole, as I expressed. We look at these various abusive schemes critically. If we address promoters, I think we'll be able to help taxpayers in the long run because they will see that various promoters will be investigated from an examination standpoint and some will also be prosecuted for their abusive activities.

Nathan Richman:   21:50
The enforcement focus at the IRS at the moment has been a subject of conversation, particularly conversations involving the national taxpayer advocate and the former national taxpayer advocate. Are you engaging with TAS as part of this emphasis?

Eric Hylton:   22:07
Well, I think they thought, as I expressed, I bring a laser-focused attention to our enforcement strategy. But also recognizing that we're balancing our service and enforcement as a idea or an initiative that we're just launching as well. Just from a service standpoint is that we have a new initiative called Hearing All Voices. And this is an initiative in which we're working with 15 to 16 different communities across the country where English is a second language for them. And we know that they want to comply with the tax laws. So we're going and having half-day educational sessions as well as listening sessions with them, so that we may hear how we can provide better service for them as well. So you have that balance of service and enforcement. We have a great relationship with the acting taxpayer advocate now. We discuss a number of issues that we have, but I think there's always going to be the balance between service and enforcement.

Nathan Richman:   23:14
Have you had a chance to meet the very recently named national taxpayer advocate?

Eric Hylton:   23:17
No, I have not. I think it was just announced this week. Yesterday.

Nathan Richman:   23:25
What is the current state of staffing at SB/SE? You mentioned the 20,000. How does that fit with where it should be and where you're hoping to go?

Eric Hylton:   23:33
So last year in FY19, SB/SE hired approximately 3,000 new employees throughout the organization. We plan on doing some limited hiring this year as well. So staffing-wise, we always could use more staffing to address many of the noncompliant issues that we have. But I think it's critically important that we look at where we hire. Just recently, we had an announcement for over 700 to 800 individuals that will be handling customer service calls, and these are our collections calls. Part of the strategy there is to address individuals who owe during the initial stages of them owing and being able to help them  address their tax balances at that time. So that's roughly 19 different cities across the country, so that is a great opportunity for us to go in certain communities as well.

Nathan Richman:   24:29
Are you in net growth for staffing?

Eric Hylton:   24:31
Not yet. Dimnuition is still a significant issue, so we'll see. We'll see.

Nathan Richman:   24:36
We've been hearing about some sorts of new skills that you're looking for in some types of, particularly revenue officers. But anything to tell us about that?

Eric Hylton:   24:44
I will say that we're always looking at a number of different skill sets that we need. Because they look at the revenue agents and revenue officers, civil enforcement investigators and using those skills. But a skillset that we haven't talked about a lot, and I think we need, are data scientists. I think it's critically important. Very much similar to my experience in CI is marrying up data scientists with the subject matter experts of revenue officers and revenue agents and really showing what does noncompliance look like as it relates to employment tax, as it relates to microcaptive. So that we can develop algorithm models to address those significant noncompliance issues.

Nathan Richman:   25:28
Have you experienced or heard of any high-level attempts to influence particular audit or exam decisions about any sort of specific taxpayers?

Nathan Richman:   25:38
No.

Nathan Richman:   25:39
Well, thank you very much for your time.

Eric Hylton:   25:41
I want to thank Tax Notes for recognizing me and some of the efforts I've done as one of the Federal Tax Persons of the Year. I have to admit that I was really shocked by the award, but thank you very much for the recognition.

David Stewart:   25:55
Our pleasure.  

David Stewart:   25:57
And now, coming attractions. Each week we preview commentary that'll be appearing in the Tax Notes magazines. I'm joined by Content and Acquisitions Manager Faye McCray. Faye, what'll you have for us?

Faye McCray:   26:08
Thank you, Dave. In Tax Notes Federal, David Higgins examines disputed ownership funds. Lee Watkins writes that utility companies effectively managed their tax deductions for tax planning and cash tax management purposes. In Tax Notes State, Michael Knoll and Ruth Mason discuss Steiner v. Utah. Sylvia Dion discusses the significance of the decision in Citrix System Inc. In Tax Notes International, Sven-Eric Bärsch and Yannick Barbu discuss Germany’s newly introduced R&D tax incentives. Tom Davies considers the need for the United Kingdom to be competitive post-Brexit. And on the Opinions page, Robert Goulder asks whether the coronavirus pandemic will necessitate further rounds of fiscal stimulus, including tax cuts.

David Stewart:   26:56
You can read all that and a lot more in the March 9 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.