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The Taxman Cometh

A new plan from the IRS lays out how the agency intends to revamp
itself.

Last week, with Tax Day right around the corner, the IRS released a
highly anticipated strategic operations plan
<[link removed]>, explaining how the agency
intends to operate over the next decade. Flush with $80 billion in
additional funding from the Inflation Reduction Act (IRA), Treasury
Secretary Janet Yellen ordered the IRS last year to develop a plan on
how that money would be spent.

Without permanent leadership at the agency at the time, it failed to
produce a report before the six-month deadline Yellen laid out. But a
new commissioner has been confirmed, and the report has been released.
And it shows a desire to remake the agency into a customer-friendly
operation for most filers, with enforcement reserved for a small
percentage of those at the top.

One of the first bills House Republicans passed with their slim majority
proposed to strip nearly all of the agency's new $80 billion. House
Speaker Kevin McCarthy (R-CA) knows that bill wouldn't pass in its
current form in a Democratic-majority Senate. Still, it signaled that
the IRS would be in Congress's crosshairs, raising the stakes for the
planning document.

President Biden's nominee to lead the IRS, Office of Management and
Budget alum and former IRS acting commissioner Daniel Werfel, was an
uncontroversial choice. It's hard to cast an agency head as the face
of government overreach when he's a self-proclaimed "rule follower
<[link removed]>"
who's worked for the federal government across Republican and
Democratic administrations. He was confirmed
<[link removed]>
to lead the IRS with the support of six Republicans and all Democrats
except for Sen. Joe Manchin (D-WV).

Werfel, in a memo to Treasury Secretary Yellen, listed five objectives
for the agency. The first two are about improving the overall taxpayer
customer service experience, by promoting compliance over enforcement
for most taxpayers and administering tax benefits more quickly. It
promises a future of real-time alerts for information about taxpayer
returns, and ways to quickly remedy errors using digital tools. Already,
the infusion of funds has led to enhanced customer service, both in
person and on the phone.

Other priorities focus on upgrading technological infrastructure at the
agency and expanding enforcement of taxpayers with "complex tax filings
and high-dollar noncompliance to address the tax gap." All of these
broad objectives, according to Werfel, require attracting, retaining,
and empowering "a highly skilled, diverse workforce and develop[ing] a
culture that is better equipped to deliver results for taxpayers." Seven
thousand new enforcement agents are expected to be brought in over the
next two years, though officials kept the numbers for overall hires more
vague.

That all might seem like bureaucratic-speak at first glance. But
Werfel's insistence on changing the agency's culture matters. When I
interviewed former IRS commissioner Charles Rossotti
<[link removed]>
earlier this year, he was critical of outsiders who saw enforcement as
the primary measure for IRS success. That kind of thinking, according to
Rossotti, allowed Congress to project their worst fears on the agency.
Others I spoke with while reporting that story said that a reluctance to
stand against congressional backlash allowed the agency to be
steamrolled for conservative political ends, thus eroding morale inside
the agency.

However you interpret that, running a federal agency is a balancing act.
Reading between the lines of Werfel's letter, it seems he's taken
some lessons from Rossotti. By saying that the agency wants to promote
compliance for the vast majority of taxpayers, while shifting
enforcement resources toward the most complex tax returns, Werfel is
prioritizing enforcement actions for tax returns that could bring the
most revenue back for the government, thus shrinking the tax gap.
Nothing Werfel could do at the IRS would turn him into a shining star
for the Republican Party. But at best, he could report regularly to
Congress the agency's progress, minimizing the perception of the IRS
as a rogue agency.

[link removed]

It appears that Werfel anticipates future political pressures from
Congress. He says he "can't overstate" the importance of the agency
continuing to receive annual appropriations for operating costs. The
entire plan he laid out is premised on receiving appropriations.
"Diverting IRA funding to cover base discretionary enforcement needs
would lead to more noncompliance, leading to decreased revenue
collection and increased deficits," Werfel wrote.

"It's really promising to see that the focus in the IRS's strategic
plan is precisely on very large corporations and high-net-worth
individuals," Matt Gardner from the Institute on Taxation and Economic
Policy told me over the phone. He added that it's undeniable these
audits require more resources, but in the long run their return on
investment shouldn't "really count as spending money" since they've
contributed to closing the tax gap far more than low- and middle-income
taxpayers.

Other measures that stood out to Gardner included Werfel reiterating
that audit rates would not increase for households and small businesses
earning up to $400,000 a year, a promise to hold harmless Americans
under that threshold which Biden has emphasized in other contexts since
he was a presidential candidate. "It's a nakedly political thing,"
Gardner said. That benchmark from the White House could prove
troublesome in the long run for Werfel, because of the way income is
structured and how that might be affected by enforcement efforts from
the IRS.

For example, a rich individual could take no salary and live off
borrowed funds without taking capital gains, while engaging in
widespread tax avoidance to stay under that $400,000 income level. That
could be a type of return the IRS would want to look at, but the
Biden-led directive is to leave it alone.

In the February hearing for his nomination, Werfel navigated the
question by saying that drastic changes in yearly income could warrant a
second look, but nonetheless, that he would not use newly allocated
money for enforcement efforts against tax filers earning up to $400,000
a year.

Elsewhere, Gardner was impressed with the document's meticulous plans
on benchmarking progress for its top objectives. Each of the five
objectives is broken into several initiatives, which are further split
between projects, with accompanying details that would measure success.
This layering of smaller iterative goals, from Gardner's perspective,
shows that the IRS is "anticipating the demands of Republican leaders in
Congress."

Tucked inside the 150-page document is a mention of how the IRA required
the IRS to "explore" a free direct-file system, presumably geared toward
low- and middle-income tax filers. However, the IRS's own language
downplays the significance such a program could have if it were in
place.

A working free direct-file system could cut out middlemen tax preparers
like TurboTax and H&R Block, who have previously lobbied
<[link removed]>
against the government offering prefiled tax services, and are
continuing to do so
<[link removed]>.
Officially, the agency is studying the feasibility of free-file, and
that report, with the assistance of the nonprofit New America
<[link removed]>,
is expected in May. From my perspective, it appears that the IRS is
first paying attention to increasing its technological capabilities and
refining data utilization practices. Whenever a free direct-file system
is proposed and not just "explored," the agency will likely portray it
as a natural step, building upon the existing customer service and
technological upgrades.

As a whole, the IRS's operating plan takes into account a lot of the
administrative and political concerns I heard from people when I
reported "Reanimating the Taxman
<[link removed]>"
earlier this year, before Werfel's confirmation. So, with a plan
circulating, now it's up to how it's implemented over the coming
years. Adjustments are likely to be made. But as Gardner said,
"There's a lot in here that you can hold a yardstick up to a year from
now and say, OK, how did [the IRS] do?"

~ JAROD FACUNDO, WRITING FELLOW

Follow Jarod Facundo on Twitter <[link removed]>

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