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August 15, 2013
15 Years After RRA '98: Time to Re-restructure the IRS?
by William Hoffman

Full Text Published by Tax Analysts®


This document originally appeared in the August 12, 2013 edition of Tax Notes.

By William Hoffman -- whoffman@tax.org


Angry taxpayers descend on Capitol Hill complaining of abuse by the IRS and prompting multiple investigations and congressional hearings, as well as the introduction of legislation that would reform -- or even abolish -- the nation's tax-collecting agency.

A scene from the ongoing controversy over the IRS's mishandling of some groups' applications for tax-exempt status? Yes. But also a replay of the storm of outrage that swept through Congress almost two decades ago and resulted in the Internal Revenue Service Restructuring and Reform Act of 1998, a far-reaching transformation of the IRS that was enacted 15 years ago.

The law -- commonly referred to as RRA '98 -- renovated the IRS's structure, governance, oversight, and powers. It switched IRS operations from a geographical focus to one focused on four classes of taxpayers.

A new mission statement pledged to assess organizational performance on equally weighted measures of business results, customer satisfaction, and employee satisfaction. Seventy-one new taxpayer protections were put in place. Safeguards such as removing enforcement statistics as a basis for IRS employee evaluations were implemented.

Technology modernization goals focused on increased electronic filing capabilities, enhanced processing of returns and refunds, and taxpayer-directed phone services.

The Taxpayer Advocate Service and the Treasury Inspector General for Tax Administration gained new independence. The law established an IRS Oversight Board, envisioned as an independent board of directors to advise the Service and remove politics from decision-making.

Fifteen years later, all the restructuring and reforms in RRA '98 are being called into question as the IRS and its overseers face public and congressional alarm about deteriorating taxpayer service, alleged enforcement abuses in the Tax-Exempt and Government Entities Division, and questionable management and training decisions. The agency also faces new challenges such as combating stolen identity refund fraud (SIRF) and implementing the Affordable Care Act.

Tax Analysts asked more than a dozen participants in the debate, drafting, and passage of RRA '98 for their assessment of its results. They compared their experience with the three "forward-looking" goals set for it in 1997 by the National Commission on Restructuring the Internal Revenue Service: superior taxpayer service; the use of contemporary, effective technology for ease of service and compliance; and the lowest-cost tax administration that is least burdensome to taxpayers. Their comments make clear that whatever progress RRA '98 made in reforming the IRS, old problems linger and new challenges face a tax system that is much changed from 15 years earlier.

A Cautionary Tale

Many legislative reforms begin in an atmosphere of turmoil, and the 1998 IRS reforms were no exception.

"It was a tumultuous period, because the IRS was sort of under siege," said Kevin Brown, who became an assistant to then-IRS Commissioner Charles Rossotti in 1998 and later served as acting commissioner in 2007. "At the time, you really felt like the IRS was under attack."

Taxpayers in 1997 and 1998 testified about egregious abuses by IRS employees. IRS whistleblowers spoke from behind black screens, their voices altered to protect their identities. President Clinton endorsed reform efforts, declaring in October 1997 that the IRS was "unaccountable and often downright tone-deaf." Brown recalled, "It led to a terrific onslaught of media coverage."

While some of the stories proved true, it turned out others were cherry-picked, misleading, or couldn't be corroborated. Star witness John Colaprete told the Senate Finance Committee in 1998 that IRS agents raided his restaurant and forced children to lie on the floor at gunpoint. He later recanted his testimony after admitting in court documents that he was not present during the raid. (Prior coverage: Tax Notes, June 21, 1999, p. 1696.)

The General Accounting Office (now the Government Accountability Office) released a report (GGD-99-82) raising questions about the gravity and reliability of the IRS whistleblowers' charges. (Prior coverage: Tax Notes, June 28, 1999, p. 1853.)

Participants in the debates knew the resulting legislation was flawed. "Whenever there's a very emotional state, it doesn't necessarily lead to clear thinking on how you legislate," Brown said.

National Treasury Employees Union President Colleen Kelley, then-chair of the union's bargaining team tasked with implementing the law, said, "From the employees' perspective, there were a lot of changes being made in response to things that were not valid, so there was a lot of anger and frustration."

"It was very emotional," said Edward S. Karl, vice president of taxation at the American Institute of Certified Public Accountants, who was director of the group's tax advocacy during the RRA '98 period. "It did spur some changes, some of which were appropriate and good, but it really was because of the particular environment."

Sen. Chuck Grassley, R-Iowa, who in 1998 was a member of the Finance Committee, said that while it was disconcerting that uncorroborated testimony was given, "when you hear the marshals and the Secret Service and the SWAT teams coming into your business and pointing guns in your face, those are real things that happened, and to some extent some of that is still happening today."

Whether the current heated atmosphere in Congress will lead to another round of reforms, no one would venture a guess. "Looking back, I think it's generally a good thing to let things cool off a bit before you put pen to paper and try to write laws that fix things," Brown said.

Brown questioned whether the rapid global economic changes over the last 15 years justify another round of IRS reform. "I don't think that restructuring the IRS right now would get at the problems they've recently had. . . . These look to me more like human errors at the moment rather than errors of structure," he said.

Not Always at Your Service

On the three goals set by the IRS restructuring commission, participants gave decidedly mixed reviews regarding the achievement of superior taxpayer service.

"Across the board with those objectives, the IRS has made noticeable progress," said James White, director of tax issues at the GAO, who as acting chief economist at the GAO issued tax reports to Congress during the RRA '98 period. "Even with the backsliding on taxpayer service [in recent years], the performance statistics show that the performance is still better than it was back in the mid-1990s."

National Taxpayer Advocate Nina Olson disagreed. "No, we don't have improved customer service," she said, noting that IRS phone service levels are hovering around 40 percent. The Service has a 55 percent rate of overage correspondence inventory and a 17-minute average phone wait time for taxpayers, said Olson, who as a community tax law project organizer in Richmond, Va., during the IRS reform efforts was invited to testify before the House Ways and Means Oversight Subcommittee in 1997 and before the Finance Committee in 1998.

After RRA '98, new call-routing technology helped put taxpayers in touch with knowledgeable assistors, and the renewed emphasis on customer service initially helped reduce call wait times, said Jeffery S. Trinca of Van Scoyoc Associates, who was chief of staff for the restructuring commission. Yet the number of taxpayers needing help has increased, and the questions they ask -- spurred by increasingly complex tax code changes -- have become more difficult to answer, while the number of people answering phones has not kept pace, Trinca said. "The same problems are cropping up," he said, adding that taxpayer service "is not a fix-once sort of thing."

Kelley said Taxpayer Assistance Center lines too often don't have enough available employees and that IRS workers are not being replaced as they leave customer service posts.

The IRS "has been realizing increased efficiencies year after year, and it hasn't worked," said White. The GAO believes that the agency needs to start making some tough choices such as whether it is willing to answer all kinds of questions, he said. "We felt last year that it was time to start facing the fact that they weren't going to get out of this mess they're in right now . . . by just trying to make efficiency gains," White said.

Regarding RRA '98's restructuring of IRS operations, Robert E. McKenzie of Arnstein & Lehr LLP said that turned out to be a mixed blessing. "They took away the geographical cohesion that they had at one time," said McKenzie, who was council director for the American Bar Association Section of Taxation in the late 1990s. Under the old structure, IRS employees reported to a single executive in charge of their multistate region, he noted, adding, "The fact that 3,000 people in Chicago had one boss, whereas those same 3,000 people now have four bosses, seems to me to be a bad arrangement."

Marcus S. Owens of Caplin & Drysdale, who headed the IRS's exempt organizations function in the 1990s, said he believes that the seeds of the controversy surrounding the IRS's mishandling of exemption applications were planted in RRA '98.

"The quality of service [at TE/GE] has declined precipitously," Owens said, noting that it can take years to receive private letter rulings and that applications sometimes sit for years before they are even reviewed. The RRA '98 philosophy of dealing with taxpayers at the lowest levels may work for wage earners, investors, and even big business but "to give the task of adapting the somewhat static tax law to these very dynamic [EO] fact patterns and putting that in an office that has no real research capacity, simply a paper processing function, is extraordinarily risky. . . . The events of the last six months or so have proven that to be the case," he said.

'Huge Leaps Forward' in IRS Tech

The score card looks better when it comes to the restructuring commission's technology goals.

From the Customer Account Data Engine 2, which reduced batch processing cycles from once a week to once a day, to the Modernized e-File system, which finally worked as advertised as the IRS's replacement for legacy processing systems, the Service has made noticeable improvements since the late 1990s, when lawmakers griped about decades and billions of dollars wasted on IRS technology modernization efforts.

"The computer system has made huge leaps forward, and I think it was the work of the restructuring act, and then the type of people who were brought in after the fact to help implement it, meaning the commissioners primarily," Trinca said.

Trinca said the restructuring commission was mindful of the link between modern technology and enforcement at the IRS. "You get more people e-filing, you get better data, you get more data, you get data sooner," he said. "You also have freed-up resources, which then can go to more people in enforcement and less people on a [phone] pipeline. . . . It may not look like it has anything to do with enforcement, but in the end it has a lot to do with enforcement."

Still, the IRS "is decades behind the private sector in the way they deal with customers who fall behind on the bills," said Russell W. Sullivan of McGuireWoods LLP, who was tax counsel and legislative director to Sen. Bob Graham during RRA '98. "In the private sector if you fall behind on your payments . . . they catch you, find you quickly, and either help you catch up or deal with the problem quickly. The IRS still has not figured out exactly how to do that effectively in the context of tax. They let things drag on for a long period of time, while interest and penalties have accumulated significantly, making it more difficult for individuals to get right with the IRS."

Kelley noted that IRS technology success is subject to the vicissitudes of the congressional appropriations process. "Ever since RRA '98 and before then, the technology dollars have always competed with the people dollars when the agency is looking for appropriations, and you need both," she said. "They still have technology needs, and they need money to be able to do it."

Enforcement and Compliance

The IRS's enforcement methods were among the first and most contentious complaints about the IRS taken up by Congress in the late 1990s. Legislators addressed those concerns through a variety of measures to rein in the Service on the one hand and beef up taxpayer protections on the other.

McKenzie said that RRA '98 made progress on innocent spouse defenses, on protecting taxpayers from arbitrary collection practices, on curtailing "lifestyle audits" that were based on anything less than significant indications of underreported income, and on improving the limited accountant-client privilege. "An entire level of taxpayer due process was created by the act," he said.

However, RRA '98 didn't include significant protections from wrongful levies, nor did it widen notice provisions to third parties, and the IRS has since taken the position that third parties don't have the same rights to notice as taxpayers, McKenzie said.

In the early years following RRA '98, IRS enforcement activity dropped significantly as the agency put on a more taxpayer-friendly face, participants said. That tilt was exemplified for some by the "10 deadly sins" contained in section 1203 of RRA '98, the violation of any one of which could result in an IRS employee's immediate termination.

"So not only did you have the prohibition on using enforcement statistics to evaluate employees, but you also had these 10 deadly sins where the employees were very concerned that if they tried to do their job or they tried to take enforcement, then an allegation would be made about them and they would be fired," according to a senior TIGTA official. "So that put a real chill on the enforcement side of things."

The move away from enforcement was substantially reversed after Mark Everson became IRS commissioner in May 2003 (serving until May 2007), the senior TIGTA official said. "Everson was the first to put enforcement back in the equation, because time had passed and he felt that if you give good customer service and fair and balanced performance, you will get what everybody wants, which is compliance," the official said.

Enforcement was hampered by the depth and breadth of the restructuring effort, Kelley said. "One of the most frustrating things for employees was this was not a two-month process or a six-month process," she said. "It took years for each of the divisions and functions to stand up, and they all stood up on different days and different months, whenever they were ready, when [Rossotti] thought they were ready, and then new leadership stood up. And it was a really long, long period of change for employees."

Resources remain a constant struggle. The IRS has 24,000 fewer employees now than 15 years ago, and 8,000 fewer than just three years ago, Kelley said. Attrition also has taken a toll; IRS employees departing in frustration over budget cuts "is much more likely to happen and has been happening in the last 18 months, and I think it's going to continue to happen," she said.

Oversight Board a 'Total Disappointment'

Participants in the RRA '98 debates expressed particular displeasure with two elements of the law.

"The biggest failure in the legislation [was] the Oversight Board," said Sullivan. The IRS Oversight Board was originally meant to provide a check on how the IRS and the commissioner were operating and using funds. The board was intended to operate like a corporate board and include members from the business community who might have joined an actual corporate board, participants said. "In reality, the IRS Oversight Board has become toothless," Sullivan said.

"Forget what you call it, the Oversight Board has turned out to be a total disappointment," agreed Grassley. "It's been more of a tool for Treasury and the IRS to get what they want -- and mostly more money -- as opposed to zeroing in on abuse of the taxpayers by the IRS."

The restructuring commission in its report, "A Vision for a New IRS," recommended that the IRS's board of directors "appoint and compensate the Commissioner and review and approve the Commissioner's recommendations regarding the appointment, evaluation, and compensation of senior IRS executives."

Paul Cherecwich Jr., current chair of the IRS Oversight Board, said the final restructuring bill negotiated by the House and Senate was meant to strike a balance between a part-time board with expertise in large-organization management, customer service, and tax law administration, and full-time IRS civil servants. "Given the fact that we are a part-time board, I find it difficult to think of areas where greater authority might produce a more positive impact over the IRS," Cherecwich said, although he added that "the absence of additional board members does have an impact on our work." The seven-member board is down to five members, four of which have full-time jobs.

Sullivan sees the Oversight Board as a missed opportunity. "The Oversight Board should've been the principal entity for giving impetus for the IRS to develop streamlined procedures from a tax administration standpoint and informing Congress to the extent that that's not happening, so Congress could act either legislatively or through the bully pulpit to make things happen," he said.

Taxpayer rights are another missed opportunity according to some RRA '98 participants.

While recognizing progress made in RRA '98, Olson said Congress and the IRS have a long way to go in protecting taxpayers' rights, to appeals, to privacy, and to certainty in the disposition of their tax affairs. She proposed a taxpayer bill of rights that included those and other provisions (as well as taxpayer responsibilities) in the Taxpayer Advocate Service's 2007 annual report to Congress , but legislation has made little progress toward the president's desk.

"Most taxpayers don't know that they have rights as a taxpayer, and very, very few of them know what those rights are," Olson said. "And if you don't know what your rights are, you can't avail yourself of them."

More Money Needed

The root problem now facing the IRS, most RRA '98 participants agreed, is adequate funding.

Kelley said, "I cannot even think of anything that could be changed in RRA '98 that would solve these problems the agency is facing, because as far as I can tell it all comes down to the annual appropriations process, and whether they're funded to do it or not. RRA '98 was supposed to help [the budget] not be a problem, and that just hasn't happened."

The senior TIGTA official said, "If you were running a business and you knew that your collections department was struggling with resource issues, and you knew the return on investment for every dollar you spent in the collections department, you'd get anywhere from $4 to $7 back, you'd probably make the investment to put a little more money in the collections department. And that's not occurring in the budget environment we have."

Karl said he'd like the IRS and congressional appropriators to recognize how much of the Service's current workload is driven by SIRF. "It's hard to believe that there won't be some significant changes over the next couple of years in the way the system is run to deal with identity theft," he said.

The SIRF problem is exacerbated at least in part by taxpayers' insistence on quick refunds, some said. "From a law enforcement point of view, you could cut [refund fraud] in half," the official said. "But the cost in doing that would be delaying the refunds. So if you said, 'Well, until we're certain that this refund is justified, we're not going to release any refunds,' you could really cut into refund fraud. . . . But nobody's willing to pay that price."

Grassley said the fate of any IRS reforms may lie with tax reform efforts. "I think it's going be difficult to get a separate [IRS reform] bill up, at least in the near term," he said.

Restructuring may not need to come from Congress, but could come from within. Corporate restructuring expert John Koskinen, who was nonexecutive chair of Freddie Mac from 2008 to 2011 and acting CEO in 2009, has been nominated by President Obama as the next IRS commissioner. (Prior coverage: Tax Notes, Aug. 5, 2013, p. 517.)

Koskinen's confirmation hearings before the Finance Committee will probably start in the third week of September, Grassley said.



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