This article appears in the February 2023 issue of The American Prospect magazine. Subscribe here.
At its core, the Internal Revenue Service (IRS) is the federal government’s revenue collector and benefits administrator. Yet with Congress inclined to run virtually every function of the government through the tax code in some form, the agency is equivalent to the central processing unit of every electronic device on the planet.
Just in the past several weeks, the IRS has delayed internet platform requirements for filing tax forms for most gig economy workers, outlined the structure of a new minimum tax on corporations, prepared to write the framework for a new tax on stock buybacks, and clarified the new rules for point-of-sale electric-vehicle rebates. Still to come are regulations for advanced energy project tax credits, clean-fuel production tax credits, carbon capture tax credits, and clean-energy production and investment tax credits, all of which were passed in the Inflation Reduction Act (IRA). Despite a lack of expertise, the IRS is a focal point of government policy on health care, the environment, manufacturing, and labor, to name just a few.
The agency must implement all of these perpetually changing additions to the tax code, in spite of the fact that it’s woefully ill-equipped to handle its basic function of ensuring that all individuals and businesses pay the taxes they owe.
Due to severe underfunding, there are immediate areas where the agency has failed taxpayers. Even before the COVID-19 pandemic, quality customer service with the agency suffered. In May 2020, the agency had a backlog of approximately 20 million returns, meaning delayed tax refunds for millions of households. Even this year, the IRS still has to complete about 1.4 million of last year’s returns. And wealthy Americans and large corporations have long gotten away with not paying what they owe, to the endless frustration of the public.
Last August, in a separate part of the IRA, Congress provided massive long-term funding for the agency: nearly $80 billion over the next decade to supplement existing appropriations. Aside from operational and enforcement capabilities, a significant chunk of those funds will go toward hiring approximately 87,000 additional employees.
This immediately became one of the fiercest attacks launched by Republicans in the midterm elections. Headlines blared at conservative websites about an army of 87,000 new agents, poking into the kitchens and bedrooms of every American taxpayer. That’s not entirely true. The 87,000 figure is an estimated total of all expected employees, not just agents. Still, in Rep. Kevin McCarthy’s (R-CA) first speech as House Speaker, he said: “Our first bill will repeal funding for 87,000 new IRS agents. Because the government should be here to help you, not go after you.” The House passed that bill days later. According to the Congressional Budget Office, doing so would increase the deficit by well over $100 billion in the next decade, which is supposed to be anathema to conservative goals.
The politics over collecting taxes are as old as the practice itself, especially in American life. Decades of conservative fearmongering have given the public the impression that the IRS is a labyrinth filled with rogue, amoral agents around every corner. It’s former President Ronald Reagan’s truest harbinger of the nine most terrifying words in the English language: “I’m from the government and I’m here to help.”
New IRS funding could restore a small measure of faith that nobody is above the law, no matter how rich.
The opportunity now exists to make those words Reagan used as a scare tactic actually mean something positive. Charles O. Rossotti, the former IRS commissioner from 1997 to 2002, in a late-December article for a tax publication called the $80 billion “a once-in-a-century opportunity to restore a depleted IRS.” The money could make customer service functional and taxes less of a chore for the vast majority of Americans, while significantly increasing public revenue simply by collecting what’s due, and restoring a small measure of faith that nobody is above the law, no matter how rich.
However, Rossotti added that the moment still presented “serious risks for the Biden administration and the U.S. tax system,” potentially leaving the IRS in a worse position ten years from now. Without a permanent commissioner who can steer the agency and ample support from the White House, this once-in-a-generation moment could fall victim to political pressure and administrative inefficiencies.
THIS DIDN’T HAPPEN OVERNIGHT. In 2010, Congress began gutting the IRS’s operational and enforcement capabilities. Accounting for inflation, the agency’s budget has dropped from $11.6 billion in 2010 to $9.1 billion in 2021. That might not seem like a lot at first glance. But this has translated to a loss of more than 21,000 employees, 15,000 of whom are enforcement staff, the type equipped with the skill set to examine the most complex returns. The high-profile release of Donald Trump’s tax returns in December exemplified the consequences of this. For many years, only one agent was assigned to audit the highly complex returns of the real estate magnate, and staff was resigned to not being able to review all of the potential issues.
The biggest consequence of a gutted IRS has been to allow systematic tax evasion by the wealthy and well-connected. Since 2010, the IRS’s overall audit rate has dropped 58 percent, including 54 percent for the largest corporations and 71 percent for those making more than $1 million a year. The number of revenue agents, the auditors capable of reviewing the most complex returns, is at a number not seen since 1954, when the U.S. population was roughly half of what it is today.
Perversely, underfunding has channeled the agency’s attention toward quick rips against unsophisticated individual income tax filers and small businesses. Lacking the technical expertise and enforcement capacity for the most complex tax returns in the country, the agency turns to the most vulnerable, the people who can’t fight back. Former leaders inside the agency told the Prospect that the agency has historically operated on a misguided culture of enforcement by any means possible, regardless of the return on investment.
Increasing the number of agents is certainly part of the IRS’s long-term goals. However, “it has to be put in context,” Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, explained to the Prospect. Much of the remaining staff is already or will soon be eligible for retirement. From the IRS’s existing 79,000 employees—the same amount as in 1970—an estimated 52,000 are eligible to retire in the coming years, meaning that most of the 87,000 new hires will go toward replacing existing staff. Nor is it guaranteed that the agency can accomplish its ambitious hiring goals as it competes with the private sector for the most qualified individuals.
MICHAEL BROCHSTEIN/SIPA USA VIA AP
During former IRS commissioner Charles Rettig’s tenure, the agency failed to audit Donald Trump in his first two years in office.
There are existing avenues the agency can take to streamline the hiring process, but that’ll be challenging so long as the agency remains without a permanent commissioner. Charles Rettig, Trump’s holdover commissioner, left last October, before it was revealed that the agency under his leadership failed to audit Trump during his first two years in office, despite auditing both Barack Obama and Joe Biden before and after that period. President Biden has nominated Daniel Werfel, a former IRS acting commissioner, to lead the agency.
As a part of the IRA’s funding, the agency was tasked with developing an operational plan for the agency to explain how it would use the additional funding. That report is due February 17, 2023. Put another way, the agency’s master plan is being drafted without the person who can carry out or provide input into what such a plan would look like and what immediate priorities the agency will take on. Even the most qualified acting commissioner cannot substantively direct the agency’s next decade. Without a permanent commissioner, the agency is functionally a faceless organization vulnerable to the worst projections of an agency run amok.
During confirmation hearings, expected later this year, Senate Republicans are likely to question Werfel on how he intends to use the IRA money. There’s no question that Republicans will try to slow down Werfel’s confirmation, though Democrats can confirm him with their votes alone. Perhaps more important, Republicans will use the hearing as an opportunity to shout about their myriad problems with the IRS.
In order for an IRS commissioner to succeed, Rossotti told the Prospect that they must manage external relationships across agencies, but above all with Congress. “I testified in hearings 48 times when I was commissioner,” Rossotti said. Next, they must build a team inside the agency. “[A commissioner] can make decisions, but he can’t execute everything.” And lastly, they have to set clear priorities for the agency. “You can’t do everything … There’s a thousand things everybody wants to get done.”
AFTER THE CONGRESSIONAL NEGOTIATIONS, the IRS will be tasked with deciding how to use its funding. Boosting customer service support will be an immediate priority. According to the National Taxpayer Advocate’s 2020 report, the IRS reported receiving more than 100 million phone calls, with employees answering only 24 percent of them. “Put differently,” the report states, “IRS employees did not answer more than 75 million telephone calls from taxpayers seeking help in complying with their tax obligations.” The report even excoriated the agency’s definition of answered calls: “The IRS ‘answered’ 23 million calls by routing them for automated responses, while 39 million taxpayers simply hung up.”
In 2000, under Rossotti’s tenure, the IRS launched the Taxpayer Advocate Service, an independent organization within the agency. The first person to head this body known as the “voice of the taxpayer” before the IRS and Congress, Nina Olson, served as the national taxpayer advocate for 18 years. She told the Prospect, “Taxpayer service has been abysmal over the last two years partly because of the pandemic but partly because it was the straw that broke the camel’s back.” She applauded Treasury Secretary Janet Yellen’s immediate directives for the IRS to reach an 85 percent phone call answer rate, 15-minute maximum hold times on the phone, and tripling the number of walk-in site appointments for taxpayers compared to the previous year.
But Olson expressed skepticism that technology alone could improve the customer service experience. “The IRS can destroy your life … It has the power to take people’s money without having to go to court and just go into your bank account and pretty much wipe it out or take most of your paycheck.” Digital options are great, but as she put it, “Taxpayers at some point in their process, if they’ve got a problem with the IRS they need to talk with someone.”
In early January, the Treasury Department announced that the IRS had hired 5,000 customer service representatives for the upcoming tax season.
The ideal candidate to take on the IRS’s most complex cases is a mid-level career professional, not a fresh graduate.
In Olson’s final report to Congress, she cited the need for a “Taxpayer Anxiety Index,” leveraging technology to alleviate the interaction points where taxpayers become most disenchanted with the IRS. She offered the example of a taxpayer needing their refund for medical bills. “They’re waiting and they keep checking the IRS’s Where’s My Refund app, and they get a message saying, ‘Your refund is in process. Check back in a week.’” That information means nothing to taxpayers. She continued: “They’re getting desperate, that closing feeling in their throat, the anxiety levels increasing, they’re not going to be happy.”
Improving the customer experience is doubly critical because the IRS is so central to how we deliver vital federal benefits. Economic impact payments from the pandemic, the Child Tax Credit, and the Earned Income Tax Credit are administered through tax refunds. Rachel Snyderman, a senior associate director at the Bipartisan Policy Center, told the Prospect, “There is an opportunity here for the IRS to really think about how it goes in this next decade as a benefits administrator.”
As taxpayer advocate, Olson cited the high default rate for installment payments to the IRS. She created a model that would flag if taxpayers would be at economic harm, using a combination of a person’s income, family size, and their previous filings, and comparing it to the IRS’s existing allowable living expense formula.
At the time, her suggestions went unheard. But in March 2022, the agency formed the Taxpayer Experience Office, one dedicated to centralizing the agency’s benefits administration and expanding payment options. This kind of focus on taxpayer experience will be vital to the IRS’s reinvention.
TWO SETS OF HIGHLY SKILLED EMPLOYEES will be needed for the IRS to carry out its most ambitious goals of upgrading the agency’s decades-old technology and properly auditing the largest corporations and wealthiest individuals: computer scientists and tax law experts, like CPAs and attorneys.
As the Prospect previously reported, $5 billion of the new funding will go toward technological upgrades inside the agency. Currently, IRS employees manually enter data. The IRA did not mandate an electronic tax filing system. However, Treasury Secretary Yellen has called for the operational plan due on February 17 to include aspects on improving the agency’s information technology infrastructure. The existing computer language used in the IRS is COBOL, a language that debuted in the late 1950s and is rarely taught to college students today.
While not all operations inside the IRS use COBOL, Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center, compared the commingling of various languages to a house with additions based on different styles of architecture. “You want the parts to look closer together,” she said.
Aside from training new hires on old technology, the agency faces additional challenges. “You have to compete with the private sector,” Holtzblatt said. Though “government benefits are really good … you have to get highly skilled computer scientists to come to the IRS and take government salaries.”
The original version of the IRA gave the IRS the ability to hire some people above the government scale pay cap. However, that was struck in the final bill because of the byzantine way Democrats had to pass the bill, through a process known as budget reconciliation. A reconciliation procedure known as the Byrd Rule enables the Senate parliamentarian to decide whether or not an aspect of the bill has an “extraneous effect” on the budget or revenue collection. If it does, it gets thrown out of the bill, and that was the case with the IRS pay scale provision.
In practice, this kneecapped the ability for the IRS to hire qualified individuals, based on a surface-level analysis that such a measure would have too minor a budgetary implication. Of course, hiring computer scientists to upgrade outdated technology could prove to be a significant investment for increasing tax revenue collection. But the budget scorekeepers typically don’t go that deep in deciding what stays and what goes.
JACQUELYN MARTIN/AP PHOTO
Nina Olson, former national taxpayer advocate, expressed skepticism that technology alone could improve IRS customer service.
Still, the IRS has other options to make necessary IT hires. The first is by hiring outside consultants from the private sector, thus outsourcing its technological upgrades. In this case, salary caps would no longer be an issue. Instead, there’s the potential for friction between the independent contractor and the agency, not to mention the fact that federal funding would be going to support a contractor’s profit margin. Another option would be the IRS going to the Office of Personnel Management and getting the authority to hire above pay caps. Lastly, the IRS could request additional funding to pay above salary caps through the appropriations process.
Whatever means lead to the IRS successfully acquiring technological expertise will also have to be used for its hirings in enforcement. The ideal candidate to take on the IRS’s most complex cases is a mid-level career professional, not a fresh graduate or recently certified CPA. Once again, the agency will be competing with accounting and law firms offering more money.
Auditing tax returns for the wealthy and big businesses, Holtzblatt explained, involves deep knowledge of the complexities of structuring income and of the ever-lengthening tax code provisions that apply. Auditors must be able to decipher whether a tax return is legal but complicated—what the IRS calls avoidance—or illegal and classified as noncompliant or evasive.
That distinction is critical. Holtzblatt further explained that the granularities in those categories are what often bog down the agency when conducting the most complicated audits. “To handle those cases,” Holtzblatt said, “the ideal would be to hire mid-career professionals from the private sector … so you’re not spending five years training them. You’re still gonna have to train them within the IRS perspective, but you don’t have to train them as long.”
Just as with the hurdles with hiring top-notch computer scientists, the IRS will face similar difficulties recruiting accountants and tax law experts. However, the pressure is even higher in this case. Holtzblatt elaborated: “This is not an area where you can outsource technology. You cannot outsource somebody who is going to be auditing taxpayer returns.” Thus the agency is forced to work with Congress for additional funding for competitive salaries, or go to the Office of Personnel Management for approval.
All of these challenges demand a permanent commissioner running the agency, who can set priorities and manage outside relationships. Werfel, a former OMB official under Republicans and Democrats and an acting IRS commissioner under Obama, has a monumental task ahead of him should he get confirmed.
IN THE OPTIMAL CASE WHERE THE IRS is adequately staffed on the enforcement side, it can begin reviewing gray areas of the tax code, such as “uncertain tax benefits” (UTBs).
To take a simple example, imagine a political science graduate student who decides to write off her cable bill from her tax filings, reasoning that her cable bill, which includes C-SPAN, is part of her work, and thus a business expense. Is that obviously legal or illegal? Hard to say.
That’s exactly what the largest companies in the U.S. do today, on a galactic scale. They know they can get away with this because corporate audit rates have dropped by half over the last decade. Additionally, if they are questioned, they’re prepared to battle on the grounds that they were engaging in avoidance, not evasion. Teams of tax preparers hired by large firms are constantly pushing the envelope of legality over whatever can be possibly written off. Corporate budgets for accounting and tax compliance dwarf the amounts that the IRS can devote to any single return.
While the complexity of the tax code is a headache for middle- and low-income tax filers and small businesses, the increasingly convoluted nature of the tax code benefits corporations and the rich. Their legal apparatuses have been specifically tasked with developing a speciality for tax avoidance. This can take the form of classifying certain costs as used for research and development, stacking government-administered tax credits, or harvesting losses that carry over from year to year to offset profits and gains.
This complex network results in the most obviously sketchy write-offs going mostly unexamined, and in the rare instances they are investigated further, those battles can take years to resolve.
As a result, Gardner explained, the largest corporations and the wealthiest individuals have benefited most from an atrophied agency. “The very largest and most profitable companies are now claiming these tax breaks,” Gardner said. “They admit it in black and white, and yet they’re not getting anything resembling a corporate audit.” A report from the Institute on Taxation and Economic Policy found that 55 of the largest corporations paid nothing in federal taxes on 2020 profits.
Even under a Democratic trifecta, last year’s omnibus spending package cut nearly $300 million from the IRS’s budget.
The IRS won’t be starting from zero working on UTBs, because the financial data already exists. There would not need to be additional resources dedicated to collecting new data points because companies already have to report this information publicly to shareholders, as required by the Securities and Exchange Commission. This reinforces why the IRS needs a commissioner who can manage the outside relationships with other government agencies.
A part of those annual financial disclosures lists the tax breaks a company claims and whether or not the company believes it could stand up to an audit from the IRS. What the company decides couldn’t pass in an audit is thus a UTB. Because UTBs are so exploited, to Gardner, it’s an obvious first step the IRS could take in ramping up enforcement.
But again, this circles back to whether or not the agency can properly staff itself in the first place. The reality is that the pool of qualified individuals with the necessary experience in corporate tax law is the same group that the largest corporations want to recruit for their corporate tax law divisions. “The IRS is definitely looking to hire folks like that,” Gardner said. “But these companies are every bit as interested in hiring them and probably have more money and certainly more flexible ways to do it.”
However, Gardner says that even with a larger workforce, it’ll take years for the agency to recalibrate its expertise. An underrated concern, Gardner says, is that redeveloping this expertise will be running against maintaining overall morale inside the agency. The worst-case scenario would be if the majority of the 52,000 employees eligible to retire do so, and at the same time newly recruited staff burn out before efficiently learning their jobs. Given an ongoing tight labor market, and high turnover trends in the private sector, it’s not impossible to imagine a similar dynamic playing out inside an agency that will have all eyes on its performance.
THE MOST VISIBLE WAY CONGRESS can sabotage the IRS over the next decade is by simply passing bills that rescind the $80 billion allocated by the IRA. The actual success of those measures is questionable, given that Democrats control the Senate and the White House and just passed this funding last August. A stand-alone repeal of funding from a Republican House would serve as little more than signaling to the public that under a Republican trifecta, that is their priority.
However, there are more arcane measures at Congress’s disposal, most prominently the appropriations process. Congress carving away at the IRS’s base funding through appropriations is the slower, less bombastic measure. But ultimately, it is the agency’s most existential threat. In fact, even under a Democratic trifecta, last year’s omnibus spending package cut nearly $300 million from the agency’s budget. So immediately, money from the $80 billion meant to supplement the agency’s existing budget is, in effect, supplanting lost base-level funding.
The hypothetical argument from Republican lawmakers to the IRS might be “You got $80 billion. Spend it. You don’t need as much in your appropriations,” said Holtzblatt. “But the $80 billion was premised on the assumption that [the IRS] would continue to get annual appropriations.” The result, Holtzblatt said, is “if you carve out appropriations, you lose the ability to add on to taxpayer services and enforcement.”
The stealth attack on base-level funding and a frontal assault on the new funding could happen simultaneously. Republicans could hold government funding, or legislation to increase the nation’s debt limit, hostage to conditions that include peeling back some of the $80 billion. At the same time, the IRS budget could be ground down in appropriations. Republicans could burn the candle at both ends.
SUSAN WALSH/AP PHOTO
Without a permanent IRS commissioner, the agency lacks leadership and vision for its critical revitalization measures.
Funding for agencies does not happen in a single subcommittee. Functionally, “the IRS is competing against other agencies,” Holtzblatt said. While the IRS looks at its budget in totality, in appropriations, a subcommittee looks at many agencies that fit together within a broad category. This point is key because the IRS has several functions, so in the appropriations process, those functions will be separately identified and appropriated for. Whether the agency gets the money it seeks or that money goes to another agency with a similar function depends on a roll of the dice. And with Republicans dispositionally opposed to the IRS, it will be a challenge for the agency to win those battles.
Aside from Congress hacking away at the agency, there are other ways the agency can be undermined. “House Republicans … figured out [in the 1990s] that if they couldn’t get their really aggressive tax-cutting plans enacted under the Clinton administration,” Gardner said, “short of that, they could hold a bunch of hearings designed to kneecap the Clinton administration’s tax-collecting capabilities.” Gardner continued: “It really put a chill on the willingness of IRS leadership to enforce the law. The public perception was out there that the agency was overstepping its authority.”
Republicans have signaled the desire for numerous investigations. A potential line of inquiry could be a data breach that happened at the IRS last September that led to leaks of some 120,000 taxpayers’ confidential information. They even want to probe the millions of letters sent out last October reminding filers of eligibility for various low-income tax credits. Republicans decided that letting people know about potential tax benefits was inherently political, even though it had been done before under Trump. Any customer-friendly tactics the IRS adopts will likely be seen in this manner.
Democrats can counteract this. Acting as human shields for the wealthy and big corporations is decidedly unpopular, even among Republican voters. Stating honestly what the GOP is up to here could be very damning. But that would require Democrats to stand up for the principle of taxes being the price we pay for a civilized society, as former Supreme Court Justice Oliver Wendell Holmes once said. The IRS has lots of detractors, but to get through the next few years, it’s going to need a couple of champions.
FORMER IRS COMMISSIONER ROSSOTTI is one of the most outspoken advocates for the agency to address undercollection of payments. In 2021, he founded the nonprofit Shrink the Tax Gap.
The IRS defines the tax gap as the difference between taxes owed to the government and what’s actually collected. An unsexy reality many want to ignore is that this gap, which has grown by $600 billion each year, and will total over $7 trillion in the next decade, is not synonymous with tax evasion, which is illegal. This lack of distinction infects ongoing debates over what the IRS can and should do with its $80 billion.
Following Rossotti’s tenure, he wrote a book, Many Unhappy Returns: One Man’s Quest to Turn Around the Most Unpopular Organization in America. In the 2005 memoir, Rossotti forecasted with scary accuracy how the agency would eventually end up: “No matter how much the IRS improves, an ever expanding tax code and ever shrinking resources to administer it are making the whole tax system more and more unfair to the vast majority of taxpayers, who diligently pay what they owe no matter what their tax bracket.”
The American Families Plan Tax Compliance Agenda, the precursor to what passed in the IRA, aimed to reduce the gap by 10 percent. The report stated that this would only be possible by focusing enforcement scrutiny on underreporting from the high-income taxpayers and the businesses they own, which accounts for the largest share of this gap, approximately 80 percent. Before the IRA, in 2021, Sen. Elizabeth Warren (D-MA) and Rep. Ro Khanna (D-CA), introduced separate bills to cut the tax gap by at least a third over the next decade, though some tax policy–centered projects have called the move misguided.
The data for potential investigations already exists. For Rossotti, the IRS’s success is not about simply asking how many more audits does the IRS need to conduct, it’s about starting from questions that ask how much revenue is the government losing? “The IRS gets two billion information reports today on about $17 or $18 trillion of income,” he said. Yet that represents a fraction of the data actually used in audits and investigations.
Aside from operational and enforcement capacities, according to Rossotti, addressing the gap requires broad implementation of machine learning technology that can automate data reports. It’s not about eliminating agents; they would still be involved in the process. In an ideal situation, streamlined reviews lead to voluntary compliance rather than working on years-old cases.
One example of how technological innovation at the IRS runs into political pressure can be seen in the decision to delay changes to the updated 1099-K tax forms that would cover many gig economy workers. Services like Venmo provide users reports on their income. Originally, Venmo and others only had to provide users a 1099-K form if they received more than $20,000 in annual income and had more than 200 transactions. Last year, the threshold for reporting dropped to $600 a year, regardless of total transaction numbers. This is in line with 1099 income for independent contractors from a single employer. Shrink the Tax Gap estimates that there is $2 billion in unreported taxes on the 1099 form.
Meanwhile, well up the income ladder, the richest use a souped-up independent classification unavailable to most other independent contractors: pass-through entities, otherwise known as S corporations. Shrink the Tax Gap estimates that the $1.2 trillion of income from the growing pass-through sector accounts for $140 billion a year in unrecovered taxes. In the absence of upgrades for machine learning technology and highly skilled agents who can analyze complex pass-through entities, it’s understandable why some would fear the possibility of IRS agents investigating their unsophisticated cases where they split meals, bills, and other expenses over apps like Venmo, PayPal, or Cash App. That threat of negative publicity was enough for the IRS to push 1099-K enforcement for another year.
Right now, the agency is making snap decisions based on political factors or paths of least resistance. A permanent commissioner who develops a plan for the agency, sets forward priorities, and regularly reports to Congress on its progress could eliminate the swings back and forth. But if and when Werfel is confirmed, he’ll be tasked with running an agency based on a plan he had no formal capacity to participate in. One of the most critical undertakings in the history of the agency is setting sail without a captain.
I asked Rossotti what challenges this dynamic would create for Werfel. “One of the biggest things a commissioner has to do is set priorities and that’s what a plan is all about,” Rossotti said. “The fact that he’s not been confirmed yet and they’re talking about a plan … I honestly don’t know. That’s a very difficult problem.”
