Tax Analysts®Tax Analysts®

My Subscriptions:

Featured News

October 21, 2014
Koskinen Interview Transcript Available
by Tax Analysts

Full Text Published by Tax Analysts®


Falls Church, VA

Friday, October 17, 2014



    Tax Analysts

    Commissioner, IRS

    IRS Communications Director

    Deputy Publisher, Tax Analysts

    Tax Analysts

    Tax Analysts

    Tax Analysts

    Tax Analysts
* * * * *


MR. HOFFMAN: Mr. Commissioner, welcome.


MR. HOFFMAN: Sometime in the next few months hopefully the six investigations into IRS' exempt organizations controversy will end, and the final reports will be issued. Assuming there are no indictments or other substantial repercussions, would that mean that the IRS has been exonerated? And if not, what it would mean?

COMMISSIONER KOSKINEN: Well, it's a good question. I think, as I've tried to make clear from the start, the issue that was raised by the inspector general's report is an important one. We needed to take -- we have implemented all of the recommendations of the IG. He's actually now reviewing our implementation of his recommendations.

I thought -- it was underway before I got there, but I thought that was appropriate and important, and I think it is important for the public to feel that, as you say, if there aren't indictments and the investigations are done, that actually it was not for naught, that the issue was an important one, we may have gotten a little carried away with all of the investigations around it, but it was important to highlight the issue and resolve it.

As the subcommittee's report already has noted, there were management failures. I have said all along that the use of improper criteria was a mistake, and that we ought not to have it happen again. We have to do whatever we can to keep it from happening.

Because the bottom line, I hope out of this will come a sense on the part of the public that we really are committed, that you should feel, no matter who you are, that you're going to get treated fairly by the IRS, and you're going to get treated the same way everybody else is.

As I've said, if you hear from us, it's because of something in your tax return or in your application, and if somebody else had that issue, they'd hear from us as well.

So, I do think it is critical for a compliant society and for the compliance program of people voluntarily filing taxes that they feel they are going to get treated fairly, and then I also think it's important for people to feel that everybody is in the game. Everybody is paying their fair share, so that when they write that check -- nobody really likes to write a check for taxes -- but when they write it, they know everybody else is writing it.

So, I think that when the dust settles, that will be my view, that I think out of it there was an important issue and it was important to resolve, and my hope is the public understands that we have been through a process, as I say, that has been a little more exciting sometimes than maybe it needed to be, but it was an important set of issues to get resolved.

MR. HOFFMAN: To follow up, I should have said this at the beginning. Please bear with me. As much as possible and in light of the amount of time we have, please be concise.

COMMISSIONER KOSKINEN: See, that's another problem. Thank you.


When I do town halls -- I've now been to 36 cities -- I once gave a short answer, I just can't remember when it was.


They have us on a tight leash here.

MR. HOFFMAN: All right. Can you tell us now whether any of the principals or actors involved in Cincinnati, Washington, or anywhere will be or have been punished in any way, not taken themselves out of the game as Lerner and Miller did, but have actually been sanctioned in some material way by the IRS? If so, who are they, and if no one has been sanctioned or punished, why not?

COMMISSIONER KOSKINEN: Well, as we have said, there are provisions surrounding that, and we are not in a position to talk about individual personnel actions, but we put out at some point in time a chart of the chain of command, and however they left the chain of command is all gone, the senior people down throught the leadership of EO have all been replaced.

So, I think again from the standpoint of the public perception on it, the process that led to the problem has been changed not only in terms of the way we handle applications, but in terms of the people who are responsible for leading that operation.

MR. HOFFMAN: Andrew?

MR. VELARDE: Yes. Thank you, Commissioner, for taking the time to come here. Last month in a notice the IRS and Treasury announced that regulations would be issued under the authority multiple statutes, including some antiabuse provisions, that would make inversions more difficult to accomplish, as well as remove some of the benefits that inversion companies have.

Some practitioners we have talked to have speculated the regs will be unenforceable. What will the IRS's role be in enforcing these regulations when they eventually do come down?

COMMISSIONER KOSKINEN: Well, we're working with Treasury because the regs are obviously ultimately policy issues under the jurisdiction of Treasury, but they all get designed and worked on by the IRS as well as Treasury together.

Our role in those regulations will be to enforce them, just as we do the rest of the regulations. In fact, as part of the drafting, the reason we participate so closely with Treasury is to make sure that both the regulations are clear and understandable but that they are enforceable.

It's obviously a complicated circumstance, but we have a lot of experience, increasing amounts of experience, in terms of auditing and enforcing tax laws as they apply to global corporations.

So, I think at this point we certainly would assume that whatever we put out, we're going to put it out in a way that is enforceable, so I'm not quite sure that I would agree with the premise.

MR. VELARDE: OK. In April, there were a few media reports that had you on record saying you thought you probably couldn't take regulatory action on inversions. Assuming you have changed your mind, now that there is a notice, what caused you to change your mind?

COMMISSIONER KOSKINEN: Well, I think at the time what we were talking about, and it's really what Secretary Lew has said all along, if you're really going to deal with this problem, it needs a legislative solution. It needs a solution really on corporate tax reform generally, but even in the inversion area.

The problem with regulations is probably behind the earlier comment, that you're dealing with it piecemeal, trying to put together a more general approach to it, but we're constrained by the statutory limitations. So, for this problem to be addressed, and I think it's been Secretary Lew's position all along, is you really have to have congressional action.

And ultimately, I think everybody agrees, you need to take a hard look at just tax simplification and reform in the corporate area, if not the entire area.

MR. VELARDE: For your goals of enforcement, given your budget constraints, do you think it is still possible -- have you estimated the costs, the personnel costs, the monetary costs of enforcing these regulations?

COMMISSIONER KOSKINEN: No, we have not. We actually do not -- when we're looking at regulating an area, to decide whether we are going to regulate it because of personnel. It is an important point that I've made. Bill can recite my talking points (Laughter).

It is an important point for people to understand, and that is as we take on more responsibilities, as we try to reach into other areas, we don't have new people. In fact, now my talking points have changed. It used to be 10,000 people. We are now down 13,000 people.

That means even the IG, as he is issuing a whole series of year-end reports, has recommendations that we should change the process, send out more notices here or there, and the short answer to that is that would be fine, but there is no way we can do that.

So, the final bottom line really is there is a limit to the idea that you can do more and more with less and less, and we are well beyond that limit.

MR. VELARDE: Thank you.



MR. O'TOOLE: I'd like to talk about large partnership audits now. Last month, the GAO issued a pretty scathing report that said the IRS is failing to audit large partnerships effectively, for a lot of reasons, one of which being that key parts of the process are "largely manual and paper driven."

Given the growth in the number and size of that sort of business, what is the IRS doing to address these problems and how soon can we expect to see substantive improvements?

COMMISSIONER KOSKINEN: It's a major problem as GAO reported, and I was intrigued to note that more and more organizations, more and more enterprises, are showing up as partnerships rather than as C corporations.

Over the last 20 or 30 years, the nature of those partnerships has changed significantly. TEFRA was established in the 1980s in a time when there were fewer partnerships but also they were much more standard, 10, 20, 50, whatever it might be partners, which what we are now confronting are partnerships that have thousands of partnership members.

TEFRA was established because in the old days we used to audit partners because the partnership itself is non taxable, so the only way to do it was work our way through the partners.

So, TEFRA said OK, we will change that, and you can actually audit the partnership but you will have to notify partners in advance and you will have to make any adjustment, push it down through all of the partners, which again is a manageable process if you've got a manageable number of partners.

So, the process we now have is if you have a partnership with 1,000 partners, and there are about 10,000 of those, if you make an adjustment you then have to track down through and in effect get amendmended returns out of all the partners.

So, I think the most significant thing we can do is whenever there is a hearing that got postponed, whenever it gets held, our position is the most significant thing we can do to break that bottleneck, and I think it is supported by a lot of people in the private sector, would be to say we need to amend TEFRA and say we can audit a partnership and when we make an adjustment to the tax findings, the partnership will absorb that that year automatically, and its K-1 for that year, the year of the determination, and have it flow through to the partners.

The issue with that is simply obviously if we're talking about an audit for 2012 and we make the determination and assess the additional tax owing in 2014, in a lot of these large partnerships people are trading in and out. But on the other hand, that happens with mutual funds all the time. You buy into a mutual fund, you know, the rule is always be careful buying in just before they declare a capital gain, because you're paying a price that always has the capital gain built into it.

So, people are used to buying and selling investments, recognizing whatever the tax and investment situation is. It would make a significant difference to us and a significant difference to the partnerships. A designated lead partner also has to share with us this burden of how do we actually get all this information flowing down through an amended K-1 and then amended tax returns.

So, it will be the most significant improvement, and that's what we are asking Congress to do. Beyond that, GAO pointed out a number of procedural issues. One of them is who is the designated partner. We, for whatever reasons, allowwed partnerships to delay that determination.

We have the ability in the absence of a designation by the partnership to make a designation, and we will do that, because that by itself extends the audit. There is a time limit in the statute. There also is a limit on the determination.

The final issue, of course, is the number of people you have, but even if we had a lot more people, the change in the nature of partnerships and their growth means without that statutory change it is going to keep us from being very effective in that area.

MR. O'TOOLE: Are you able to get people at the examiner level who are well enough versed in the subject and can actually go toe-to-toe so to speak with the partnership lawyers or is that also a problem?

COMMISSIONER KOSKINEN: That's a more generic problem for us. It gets me back to the budget. Historically, and even in the private sector, from my experience there, is when times get tight, the first thing that goes is training, because it always looks like you can do without that.

My experience in mostly dealing with challenged organizations for 40 years is the last thing that ought to go is training. You need to make sure you have appropriately trained people and you appropriately continue to provide training to people in the organization to develop them and promote them.

So, the technical issues are not that complicated, we got a lot of technical issues in the international areas, but the partnership K-1 and subsequent issues are complicated just because of the nature of the organizations.

There again, over the last couple of years, before I got here, we have been substantially constrained because of the budget, training budgets. One year, the training was cut by 85 percent. As I said, whatever you thought about training, the answer probably wasn't an 85 percent cut would be the right thing.

So, we don't find that the issues are so complicated in this area they are overwhelming our employees, except in the case where we haven't been providing the necessary training. So, my position has been -- I'll get some grumbling, I'm sure, from the appropriators -- that whatever the budget is for '15, I don't care what that number is, we're going to provide training. If that means we have fewer people, we do less work, we are better off with highly trained employees able to do the work and able as you say to go toe-to-toe with taxpayers.

Also, because I hear from practitioners they benefit if our people are really actually very skilled, you have a meaningful dialogue. To the extent that they feel they have to spend a lot of time educating our people what the law is and why they are taking that position, it puts them in a difficult position.

So, I think the caliber of the people and the training is not a particular issue with regard to large partnerships.

MR. O'TOOLE: Thank you.


MR. STOKELD: Thank you.

COMMISSIONER KOSKINEN: It's kind of like a shooting gallery.


MR. STOKELD: I have a couple of questions about IRS examinations of churches. The Freedom from Religion Foundation recently said the IRS designated an individual to authorize a tax inquiry if there is a reasonable belief that a church may no longer qualify for tax exempt status.

Who in the IRS is designated for that work and in what position and in which office?

COMMISSIONER KOSKINEN: That's a question I don't know the answer to. I pride myself in knowing the answer to most things. I can't tell you who that person is at this point because I actually don't know.

I think it is important, because there has been a lot of back and forth around that case to understand that there's been some misunderstanding in the closing and settlement of that case, the withdrawal of it, that we were somehow changing our standards or our level of review, and there's been an issue about there were 92 churches under review going forward, which there have been.

Those reviews were part of our ongoing process and we are continuing to review churches in the way we have in the last several years, so the issue in the case was were we doing reviews at all, and the litigants were satisfied that we did have a process for reviewing them, but that has then spread out into the world into somehow we are doing something very different and we are going to show up either more aggressively or more often in a different way than we have in the past, and that is not what that case was about at all or the settlement of it.

MR. STOKELD: OK. Can you tell me approximately how many IRS examinations of churches are going on at the moment?

COMMISSIONER KOSKINEN: Well, the number that has been provided is there were 92 that have been underway, that were underway over time. I think the question was were any under review, and it was reported there were 92 under review.

Again, the point was those weren't started as a result of the litigation. Those have been part of the normal review process.

MR. STOKELD: OK. Finally, any update on the final regulations under Section 7611, which governs church tax exams?

COMMISSIONER KOSKINEN: I'm pushing to get them out. We don't control the process totally. As I said earlier, we work with Treasury and those regulations ultimately come out under -- they are viewed as IRS regulations because we administer them, but the policy decisions behind the regulations are the responsibility of Treasury.

We meet every two weeks, a group of us, who are reviewing that, and it's one that is under review and that we are trying to get out. It's been pending for a while. My goal in life is to not have issues lie fallow for too long.

I used to tell my wife when we played bridge that you can look at the cards all you want, the spots aren't going to change, you have to play the hand.

I've had that conversation in some of our regulatory meetings, the ones that are out there longer are the ones that are obviously more difficult and complicated, but as I said, the decision doesn't get any easier the longer you wait, so you are going to have to make the decision, so you might as well make it earlier rather than later, and at least move it forward.

MR. O'TOOLE: OK. Thank you.

MR. HOFFMAN: Lindsey?

MS. McPHERSON: Yes. I have a couple of questions. First, the IRS exempt organizations determinations division has a quality assurance unit, as you probably know, which according to IRS materials, is tasked mandatory review of all exempt applications involving sensitive political issues.

Why was the quality assurance unit unable to prevent the mishandling of political groups' exempt applications?

COMMISSIONER KOSKINEN: Well, we'll know more when we get all of these reports out as to exactly what went on. But if you read the IG's report there's been some issue about, well, did he look at all the broad political spectrum.

But I think what happened there was because these were politically sensitive issues as far as we can tell because I'm not running my own investigation of it, what stopped things was not the quality review process; what stopped things was -- and the problem wasn't that people were being denied. The problem was that decisions again weren't being made, and it was because of the frontline, as these started, the volume began to increase. The process was people were looking for guidance from the frontline about, OK, how do we handle these? What's the appropriate way to deal with them?

And at one point in time there was a year delay while people were trying to figure out what the guidance was as it went forward. And again, kind of my example, one of the problems is you shouldn't have a year -- nobody should have to wait for a year while somebody is trying to figure that out. It's a complicated issue and they were obviously troubled by it, but it didn't get any easier by waiting. And all that happened was a whole set of applicants of various stripes, but certainly most of them conservative, were sitting waiting in line. And so as we say, what's interesting about it, most people assumed that what happened was a whole lot of people got denied. What really happened was for up to two years a lot of people just didn't get any action at all.

So the quality review issue would be as you issue denials or as you are denying, the quality review people would -- there's two ways. First, there's a review process at the front end for existing organizations to make sure that any audit is selected randomly and according to criteria, and no individual can require any taxpayer, exempt or nonexempt, to be audited. There was a review process to make sure that when there's an audit, it's on a nonindividualized basis.

In this case, the quality review would be if you're going to deny an application or in an audit issue a finding, the quality review process would then say, OK, how did that go? So as I say, the quality review problem wasn't the problem here. It was a problem at the front end. People just were not making a decision. Then, when they finally decided, you know, they had started out saying, well, OK, we ought to be on the lookout. We have to collect anything that looks like it's going to be an issue, and then we'll find out what we should do with them, the famous BOLO list. So one of the IG recommendations -- I meet with the IG once a month -- as he noted in his review, is they said we ought to monitor and be careful about BOLO lists. What the process was appropriately was the BOLO lists had just simply disappeared. There aren't any of those anymore. The problem really was that at heart was -- the identification was just what the name was. It had nothing to do with what the organization said it was going to do, and people shouldn't be judged just by their name.

MS. McPHERSON: So what I hear you telling me is basically on the applications, because they were delayed so long, that the quality assurance division never got to the applications because they hadn't been issued a determination. So given that they weren't involved, are there reforms that you can make to that unit to make sure that there are more checks and balances throughout the process?

COMMISSIONER KOSKINEN: Yes. Part of the IG recommendation is that we make sure at the front end, if there are going to be organizations or applications selected for any special treatment, that there be a review of that; that any adverse proposed determination be reviewed by a quality review board and that, as I say, to be clear, that no organization in this area, no individual can select an organization for audit. That was the process. So the question has been, OK, how do you -- if that was the rule before, how do you make sure that doesn't happen again? And the IG had recommendations procedurally as to how to in effect improve that process. And so we've taken those steps to try to make sure again, because I do think it is important for people to understand that if you meet the qualifications, it shouldn't matter what your social welfare organization activities are going to be, what you're going to be a social welfare activist about.

Obviously, the next interesting issue will be when we issue the redrafted regulations for 501(c)(4) and other (c) organizations in terms of what the definition of political activity ought to be, how much of it can you engage in, and to which (c) organization should it apply. And we expect to have those -- that redraft out for public comment early next year.

MR. HOFFMAN: All right.

MS. McPHERSON: I have one more question.


COMMISSIONER KOSKINEN: Are we having a sale today?

MS. McPHERSON: Not unrelated, but back to the congressional side of things, there was a hearing before the Ways and Means Committee on June 20th. You were giving the IRS explanation for the missing emails. And after your explanation, Paul Ryan told you, "I don't believe you." Paul Ryan is going to be, in all likelihood, the next chair of the Ways and Means Committee. Given that, and other confrontations that you've had with some of the House majority members, how do you plan to repair your relationship with Congress, particularly the House majority?

COMMISSIONER KOSKINEN: Well, I think my view is I have actually a good and appropriate working relationship with the House and the Senate in general, and our oversight committees in particular. Ways and Means and Finance are the direct oversight committees for us. So I have met with virtually every member of both committees. And I meet with them regularly. Some people have noted that at the end of that hearing, which was four hours on a Friday, and then Monday night another four hours with the Oversight Committee, somebody said, "Well, do you go up and shake hands with people afterwards? How can you do that after you've had this contention and discussion?" And my sense is, and I think it's their sense is, the hearings have, you know, a certain set of purposes and focuses about them, but we're all going to work together going forward so that even when people are more personal in their attacks than might be normal, my sense is, you know, it comes as I said, as people ask me what do you think about that? I said, it comes with the territory. You're going to have difficult issues. You're going to have confrontations at various points in time. But you know, there are a whole set of issues you're going to deal with over a number of years, and so it's important not to burn your bridges. And I think the Congress feels that way. So I have very congenial conversations with Chairman Issa, for instance. Even though if you look at the hearings, of which I've had five or six, you'd be surprised about that.

And I met with several members of the Oversight Committee as well. So my view of dealing with the Congress, as much my deal with the press, is we need to have a transparent working relationship. If they've got questions, we need to provide them answers as quickly as we can. So I'm very comfortable with both our Congressman Ryan, Chairman Issa. Chairman Issa will step down. Chairman Camp is retiring. But I'm comfortable that we have a good working relationship even in the middle of sometimes difficult conversations.

MS. McPHERSON: OK. Thank you.

MR. HOFFMAN: Andrew?

MR. VELARDE: Commissioner, I'd like to talk for a few minutes about the whistleblower program. You've been a very vocal proponent of the whistleblower program. You made some improvements with regard to increasing the staff recently. I think it was 70 percent -- you increased it by 70 percent to hopefully improve the efficiency of the program. And while some practitioners I've talked to, they've expressed optimism on this point, but they also had some greater frustration because it's still taking a long time to get payouts done, and they said that a bigger issue here is a lack of audit resources. Are there any plans to permit prioritizing of whistleblower claims in the audit process?

COMMISSIONER KOSKINEN: There aren't at this point because the whistleblower cases are cases -- we have exciting and important large cases under audit across the board. And so I think, as you note, I am a supporter of the program. I do think it's important because, as I've said, if you're running a complicated organization planning some tax strategy to -- it's one thing that everybody tries to minimize their taxes, which is fine, but if you're trying to cut corners and actually not follow the law, I think it's helpful for people in large organizations like that to worry that, well, you know, a lot of people know about this and there's a self interest in somebody actually turning us in. So while we all have the playground concern about snitches as it were; these are actually people trying to get the law enforced. And so I'm supportive of them.

And I understand the frustration. One of the major frustrations is time, and it reflects not only the time it takes us in complicated cases, because these are usually complicated cases to complete an audit, but the rule is you can't make a payout until closure, which includes the rights of appeal to courts. And again, because these are often large cases of some significance, you can end up with several years going by.

So I have been -- one of the issues has been, well, it kind of goes into a black box and you don't hear about it, so one of the things we're trying to do within the protection of taxpayer information under section 6103, is at least as I've said, let whistleblowers know we know they're out there and we haven't forgotten about them. Sometimes years would go by and you wouldn't even know whether your case was still around. So again, I think at a minimum, we ought to be able to once in a while remind people we know you're there and we're working on it, but it probably for us is difficult to say a case is more important because it's been brought by a whistleblower than an equal similar case that hasn't been brought by a whistleblower.

MR. VELARDE: Well, perhaps not more important but, now, admittedly, this is a few years old, but there was a TIGTA report from 2006 that showed examinations issued on informant information had a higher return adjustment dollar yield per examiner hour than had happened under other exams. You commented about the IRS facing budgetary constraints. Why shouldn't the IRS, given this information, start leaning more on the whistleblower program just in terms of being a more efficient vehicle?

COMMISSIONER KOSKINEN: Well, our examination process, and how we determine our examinations is not focused just on how much money we collect because if we were going to do that we'd just go to large corporations and wealthy individuals and we'd get a better return. But it's important for everybody across the taxpayer spectrum to know that we care and that we're watching and that we're showing up. So we do audits of, you know, small corporations, middle class, lower-income taxpayers, recognizing we're not going to get $4 million in a tax adjustment. We try to select those by indicators where there will be a change. We measure the no-change rate. So if we are auditing in an area and getting, you know, an 80 percent no-change rate, it means that somehow we're not -- because we can't audit everybody -- we're not selecting cases appropriately. But it is important for everyone across the spectrum to feel that the IRS cares about this. They're watching. They're not simply going after people with a lot of money. So we have to actually spread the exam resources, and my concern again is that we have fewer of them. But we have to spread them across the board because we can't afford for the overall compliance for people to feel, ah, they don't care.

Because ultimately, one of the things, as I adjust my talking points to keep Bill paying attention, is we talk a lot, and it's appropriate for us to worry about what is happening to our collection rates when we have fewer revenue agents, officers, and criminal investigators. But enforcement -- and now I'm worried about taxpayer service and the fact it takes you forever to get us on the phone. But they're both two sides of the same coin, which is compliance. And so one of the issues that I think gets lost sometimes, even in my discussions, although serious, the big issue is compliance. You know, the deficit went down this year, not because we spent a lot less money; it went down because we had a higher tax return. It's not because we were more efficient. I mean, a lot of things go into why we collected $300 billion more this year.

But the key thing to recognize is if people decide, you know, their chances are diminishing such on the enforcement side they can take more risk, or they get very frustrated or aggravated or just don't get the information they need to file on the taxpayer service side, ultimately, the risk is the compliance rate. If the compliance rate goes down by 1 percent, it costs you $30 billion a year, which dwarfs the amount of money we're talking about. You know, the IRS budget is three times the IRS budget. And I think that's the issue that I'm concerned that when you say, well, you know, what happens when you have 13,000 fewer employees and you don't provide training and you can't do all this stuff, at some point, the way that gets reflected as a problem is not that our $50 billion we collect goes down -- because that may go down, and over time will -- it is, in fact, if you jeopardize the compliance rate, you're going to actually start to lose a lot of money. And that's the problem. You go to European countries and places where they don't have a compliance record that we have, a lot of it is because taxpayers there figure nobody ever comes around and asks or this is the system. It's not fair. Why should I pay? Nobody else is paying. Whether anybody's getting checked out. Or it's just an inefficient process. You never get an answer and they don't seem to be running things.

So when you suddenly get a compliance rate that's 5 or 10 percent, let alone 20 percent below, you have a huge swing and a great threat to the operations.

MR. VELARDE: Just one more follow-up on the whistleblower program. You said in the past that you do intend to urge Congress to pass legislation to better protect whistleblowers from retaliation. These anti-retaliation protections exist for things like SEC whistleblowers, but are missing from the IRS statute. Can you elaborate on specific measures that are being considered? And if you have talked to congressmen, what's their basis for expressing opposition to any of these measures?

COMMISSIONER KOSKINEN: I don't think there's opposition to them. You know, it's one of those things, at this point, obviously, the Congress has got a whole range of issues again that probably they view as appropriately more significant, and it's been difficult for the Congress to actually get together on some major issues. But I do think it is important for there to be whistleblower protection. I think some people are hesitant about it. It may well be because they're hesitant about the whole concept of the whistleblower issue. So you'll see some of that reflected as it goes.

But I think ultimately, it is important for, as I say, if the program is going to be effective, for those people who have taken a step, because it's not an easy step. If you're in a company or you're in a law firm or the accounting firm and now you're there, we protect to the extent we can the whistleblower's identification. But, you know, you're taking a big risk. You're going to draw a line between you and wherever you are, and if you're going to get retaliated, we ought to minimize that risk as much as we can and get people comfortable that if somebody does retaliate -- you get fired the next day -- that, in fact, they're protected, which in a lot of ways they don't have that protection today.

MR. VELARDE: Thank you, Commissioner.

MR. HOFFMAN: I've got a couple of general interest types of things.

How long of a filing season delay would you expect late passage of the extenders package to cause, especially if it included major changes to the research credit as proposed in the House-passed bill?

COMMISSIONER KOSKINEN: Well, it's hard to know exactly. You know, we have some history in the past where we've gotten legislation or significant changes. And in some cases it has meant not that the season gets delayed for everybody, but it means we don't accept -- can't accept returns sometimes until February or March. So a couple years ago we started filing season, you know, the end of January, but there were a whole set of returns that couldn't get processed until into March or April. And so that's probably more likely to be the scenario here. If we get late passage and complicated changes, what's going to happen is we probably will have to delay filing season to some extent to start doing that, but we'll try to open filing season for the average person not affected by those. But it's going to mean that anybody affected at all is going to see delayed ability to make their filings and for their refunds.

There is a risk if it gets overly complicated, which I don't think it will, but you would actually have to delay the season even into February. The problem with delaying at the front end is it creates more problems for us in the sense that April 15 is a fixed date, so you compress all of that processing and all of the reviews and the work into a shorter and shorter period. And so it's a problem for preparers and it's a problem for us. So that's why I've had conversations with the leadership of Senate Finance and House Ways and Means Committee, and they are, I think, all sympathetic and supportive of trying to make sure that we herd this process forward.

As I've said, we're just tax administration, so we're agnostic about what gets extended or doesn't get extended or what the policy issues are, but we do think if this gets into mid- and then late December, even if there aren't a lot of changes, the closer you get to the end of December, the greater at risk you put us at the start of the filing season. And the difference this year compared to 2012 and the past is we also are having to implement the Affordable Care Act and FATCA. So we have right now probably the most complicated filing season before us that we've had in a long time, if ever. And so when you put the extenders on top of that, it's not as if that's the only issue that's going through our IT system development. So it's a -- it's always complicated for extenders. This year it's a heightened problem because of the fact that we have all of these other statutorily mandated changes that are going through.

MR. HOFFMAN: What did you think of Steven Miller's comments last week that he's not sure that FATCA's benefits will outweigh its costs, which were followed, I believe, followed shortly thereafter, by Nina Olson's comments somewhat along a similar vein, concerned about the cost versus benefits of FATCA?

COMMISSIONER KOSKINEN: Well, I think it's always an important question if you're going to make statutory changes and increase, by definition almost, some burden to some extent. You know, what do you gain from that? You know, we've already collected 6 or 7 -- now over $7 billion in additional revenues that would otherwise not have been collected just through the offshore voluntary disclosure program. And, you know, that's -- there the burden was simply people had to come forward. It was a fairly straightforward process, so there was a fairly significant amount of money in return.

I've always thought that the problem you have is you can't measure the benefit just by the taxes you collect. What you have to do is measure the benefit by the overall impact on the system generally. And what I've always been, even before I got here, concerned about was if the average taxpayer felt I'm paying a greater burden of supporting the government because rich people with fancy lawyers and accountants don't have to pay taxes, they can hide money in Switzerland. You know, hiding money in Switzerland has been a visible issue for 50 years. It's corrosive to compliance and corrosive to the system. So when you're going to talk about measuring the benefit, you can't look just at the burden and the additional resources we get out of the filings there.

But having said that, there are indications, not surprisingly, there was a preliminary review that said between 2011 and 2012 -- in fact, you guys reported it -- we got 500,000 more returns about foreign accounts with $100 billion of income. And we're seeing the same thing in 1099-Ks.

One of the things I've been intrigued about is we have a compliant society. People want to be compliant. They are much more compliant if they think we have data and they think we actually know something. So my favorite thing that I had never heard of before was it used to be when I was younger and my kids were younger, you filed dependents, you know, the number of dependents cooperative you just put 2. Then the law was changed and you had to put their Social Security number. In one year we lost 7 million children.


COMMISSIONER KOSKINEN: It's either a significant plague or it turned out people thought, well, I guess, you know, they actually can find out whether these are my kids or not. And nobody's gone back to figure out what that was. Some of it, I'm sure, was people were still their children, but no longer were fully dependent, but were in college or wherever it was and they just thought it was easy to keep subtracting.

But all of our tax gap analysis and the rest of it has shown the same thing, that individuals have a very high compliance rate because we get W-2s, 1099s, and small businesses, medium-sized businesses have a relatively poor compliance rate, estimated in the 50, 55 percent range because we don't have a lot of data until recently. Now we have the 1099-Ks. The credit card companies send the merchants and us their credit card receipts for the year. Compliance rates, even without us doing much, have already gone up very noticeably because, again, a lot of businesses are saying and preparers are saying, well, you know, they know, you've got all this money.

The interesting low-hanging fruit when you match it up is the companies reporting less revenues than the credit card receipts. So, you know, you have to be really out of compliance. The next thing you discover is people say, well, OK, I have magically, yeah, all of that, but no cash receipts. We've been able to model what's the normal dry cleaner or barbershop, whatever, what's the ratio of cash to credit card receipts as you go.

But even as we do that, as I say, and we're tracking, the voluntary compliance rate is going up as we go. In some cases, when people match, the revenue goes up, then suddenly their expenses magically go up. But those are signals that we can follow.

So I think in FATCA, when you look at it, you won't be measuring just by the amount of money we collect from the people we catch. You won't be measuring it just by the increased reporting and money we collect from people who now are with the program. Ultimately, the benefit is, again, protecting the overall compliance rate in the sense of the average taxpayer that it's a fair system.

MR. HOFFMAN: Well, actually, we are just about out of time. I'm going to ask one more and then I'm going to give it to the table, if that's OK.

Is there a role for the private sector to help cut down on the amount of taxpayer fraud faced by the IRS, not limited necessarily to stolen identity refund fraud, but including the EITC and child care tax credit and coming up, obviously, the premium tax credit under the ACA? Could the private sector help in some of these areas more easily than in others?

COMMISSIONER KOSKINEN: Right. We have working partnerships in a lot of areas. We have advisory groups and (inaudible) groups and we have what I think is a terrific relationship with the preparer community. The software developers we work kind of hand-in-glove with as we develop with ACA, for instance, regulations and work with them to figure out exactly what the forms are going to look like and what their systems have to look like so taxpayers can provide us information. So that by itself is a significant help to us. I mean, depending on whom you ask or whether they're using preparers or just the software, 80 to 90 percent of people filing are using software. So the software gives us an opportunity to provide people reminders of don't forget about this or have you thought about that in the course of just filling out those questions, which helps with compliance significantly.

You then move into the issues of due diligence where you then, particularly in the EITC area and child tax credit portion, have the question, OK, what's the responsibility of the preparer to make sure that the information they're collecting is accurate? And one of the reasons we wanted to and do now have a voluntary registration program for tax preparers is to try to make sure that tax preparers have a minimal amount or a reasonable amount of understanding and education about the tax laws and the changes each year.

Because tax preparers generally fall into three classes. There's a set of preparers who are well versed in the tax law and conscientious and hardworking. And there is another -- that's smaller -- and the biggest group of preparers do a great job. There's a smaller group who mean well and just don't keep up or don't have a lot of background and experience, and so they're just making good-faith errors, but they're errors and we can find that. Then there's a very small group who are crooks, who are advertising come with me, I'll get you a bigger refund.

Now, I've tried to make it clear if we had the required program that the court struck down, and we have legislation trying to change that, the crooks aren't going to register in a large step. But what happens is if you have -- well, now, in the voluntary program you get a letter of completion that you've gone through the testing and the updating. It at least gives taxpayers a minimal basis for deciding does my preparer know what he's doing?

Now, again, if you're looking for somebody who's going to cut corners, you may not go to the guy with the certificate. So we require now in the EITC more responsibility by the preparers to make sure to exercise some due diligence, to make sure that when somebody says they've got four kids that they're responsible for, you know, they've got some evidence of that as we go forward. And so that is an area where, you know, we think is very helpful, that the private sector, particularly in the preparer community, can be helpful.

We are developing for large corporations, over time we've tried to develop, a more cooperative relationship of how did the audits go as opposed to just showing up and saying give us everything you know and we'll spend years together working through the forest. Can we become more focused and saying, OK, these are the issues you're concerned and we're concerned about? We're going to focus our audit on those and we're going to actually try jointly to figure out what the right answer is so you'll know. Because having served on three different large corporate boards, most corporations spend a phenomenal amount of time, you know, as individuals just trying to figure out what the right amount to pay is. Nobody wants to pay more than they owe, so they spend a lot of time trying to make sure they're paying the right amount.

But an audit in large corporations kind of are forever in an audit. An audit by the IRS is just a huge time sinkhole. They have tax accountants, tax lawyers, and their internal staff all then going through all of this stuff. And if we can streamline that, it's in their interest and ours because we can come to an agreement of what the right amount is.

I mean, ultimately, as I've tried to get people to understand, we try to distinguish between the people trying to become compliant and those who have no interest in being compliant. On the individual basis it means that the people who we're trying to get the message out if you're trying to be compliant and you have a problem -- you lost your job, you have a health issue, or that -- as I say, you don't have to hire somebody off late-night TV to come talk to the IRS. You can actually talk to us because we will try to work with you with installment agreements, offers in compromise, whatever it is. We would like to help you be compliant.

For corporations it's the same thing. A lot of them really are trying to be compliant. And as I say, for the others, individuals or corporations, I'm happy to chase them to the end of the Earth and throw them in jail. And people need to know that's our view. We're not happy if you're really cheating. But if you're just having difficulty, it's part of my concern about our taxpayer service levels, then we're really -- we spend a phenomenal amount of time trying to help taxpayers.

MR. HOFFMAN: Well, your answer seems to say to me -- correct me if I'm wrong -- that you're already doing a lot of stuff with the private sector. You've got a lot of different areas where you work with the private sector. What I was trying to get across with my question was are there new areas? Are there areas that would increase the efficiency? For instance, chasing taxpayers to the end of the Earth when they refuse to comply, is that really the most efficient use of IRS resources or would it be possible to outsource that to a third party that would chase them to the ends of the Earth for us?

COMMISSIONER KOSKINEN: Well, let's talk a little about debt collectors. We've tried that a couple times.

MR. HOFFMAN: I'm using that only as an example.


MR. HOFFMAN: Wondering if there are other areas besides that --

COMMISSIONER KOSKINEN: Other areas besides that we could do.

MR. HOFFMAN: -- besides the ones that you've just outlined.

COMMISSIONER KOSKINEN: Yeah. Well, let me just for the record just say that debt collectors, private, outsourcing debt collection, turned out to cost us money rather than save money. So to some extent, back to the (inaudible) program with a large -- the CAP program with large (inaudible) -- that's, you know, the -- I think the places where we get the best return on our effort and in terms of reaching out to the private sector is, if we can make it, the dialogue we have with them, more transparent and more straightforward. OK? It goes back to the compliant/noncompliant.

If you are dealing with a whole set of large or complicated -- even partnerships, as we talked before, most partnerships are not trying to cheat. They've got enough other things to worry about. If you can try to figure out with them how to make the process more efficient and straightforward, that helps us a lot and I think helps them. I mean, ultimately, a tax simplification would help everybody. That's a statement not of policy; that's a statement of tax administration. But I've made it clear to people on the Hill, anybody who wants to do tax simplification, we're happy to help them look at it from the administration side.

So I think we get the biggest return and that's what we really are focusing on is how do we make it as easy as possible for people to figure out what they owe and to make that payment. And so it's not can we get tax accountants to do more or tax lawyers to do more. I mean, we need to communicate with them. When we do that, we go to forums, meetings, we try to get information out, you know, even in advance of regulations coming out, telling people what's coming.

But ultimately, to really be effective and efficient, you need to be able to figure out how do I most efficiently deal with you? And in the individual side, for instance, one of our goals, and we're going to spend more time talking about it with appropriators going forward, is taxpayers ought to be able to deal with us the way they deal with their bank, Wells Fargo, Bank of America.

You ought to have an account, and you ought to be able to authenticate yourself. And then you ought to be able to go in and look at your history, get your old transcripts, figure out where your refund is, what's happened to your present tax filing, if you made a payment in response to one of our letters where did it go, did it go to the right place. Ultimately, you ought to be able to when you file, we could immediately tell you back, hey, did you forget this W-2? If you did, just file an amended return. And we could be talking with you about your return while you had the records as opposed to two years later when you got to go find them in the basement or wherever they are.

So we're constrained by resources, but we're actually -- one of my priorities is to say let's quit doing some things and make sure we could make that happen. Because there, again, with taxpayers we'd have a much more convenient communication device rather than it's all by letters and you hear from us later and then you got to write back or you call and you can't get through. If you could just go online and say, you know, I'm Bill Hoffman. I can now look at as many years of my tax returns as I want. I can see what I filed. I can see where my refund is. All of that stuff now you either have to call or we've gotten some apps that get you some of that information.

But I think that's my answer to it is that it's not as if somehow there's a set of people that you could get to perform better with us than they do now. It's really can we get the taxpayer into a more efficient working relationship with us, which would make us more efficient.

MR. BRUNORI: Bill, unfortunately --

MR. HOFFMAN: Ah-ha, somebody has come (inaudible).

MR. BRUNORI: Bill, unfortunately, our time here is at an end. So I want to thank you again, Mr. commissioner. It really is an honor for us to have you here.

COMMISSIONER KOSKINEN: Well, it's my pleasure to be here.

About Tax Analysts

Tax Analysts is an influential provider of tax news and analysis for the global community. Over 150,000 tax professionals in law and accounting firms, corporations, and government agencies rely on Tax Analysts' federal, state, and international content daily. Key products include Tax Notes, Tax Notes Today, State Tax Notes, State Tax Today, Tax Notes International, and Worldwide Tax Daily. Founded in 1970 as a nonprofit organization, Tax Analysts has the industry's largest tax-dedicated correspondent staff, with more than 250 domestic and international correspondents. For more information, visit our home page.

For reprint permission or other information, contact