hink you’re busy this month? Imagine being Mark W. Everson, Commissioner of Internal Revenue, heading into tax season with a $10 billion budget and a staff of 100,000 to manage. Appointed by President Bush in 2003, Everson is a man on a mission. He’s almost halfway through his five-year term—and determined to deliver on his charge to reorganize and modernize the nation’s tax administration agency without sacrificing its goal: to serve the American public “with integrity and fairness for all.” But even as tax season revved into high gear, he took some time in March to talk with the JofA ’s Geoff Pickard about his personal priorities, his enforcement efforts and his high hopes for closer relationships between his fellow CPAs and the IRS.
MONITORING STANDARD SETTING
JofA: What do you consider your major accomplishments since taking office two years ago?
Everson: As I came through the confirmation process, and even in the initial months, Congress, the public and business community people felt that enforcement was a dirty word. I think we’re beyond that now; there’s a recognition that the IRS needs to provide service but also enforce the law. Enforcement has to be done correctly, of course—evenhandedly, fairly, with respect for taxpayer rights. There has to be a balance.
We say, “Service plus enforcement equals compliance.” The big change in the past couple of years is that it’s now understood and appreciated as an appropriate approach for tax administration. We have started to bring enforcement back.
JofA: How would you compare your overall policy direction with that of previous commissioners?
Everson: I’m the second IRS commissioner to come in under the Reform Act of 1998, which established a five-year term for the commissioner and a new model that saw the executive as a leader of this sprawling organization of 100,000 employees, with lots of different responsibilities.
It’s difficult to compare what Charles Rossotti and I faced with the previous model, where typically the commissioner was a tax practitioner and not a manager.
When Charles came in there was concern about the services the IRS was providing—or, more correctly stated, failing to provide—to the public. He worked to improve services, to reorganize the IRS around taxpayer segments and to make the service more transparent and efficient. I think he achieved that goal. There’s no doubt the IRS made a lot of progress.
But for a variety of reasons the enforcement side did languish; the presence receded. We’ve improved the services, and now the principal work here is to rebalance the agency.
We have three strategic priorities: to continue to improve service, to enhance enforcement and to modernize the agency. The first two are operational objectives, but in order to make them work you have to spend a lot of time on the third. Charles launched a lot of very important actions in that area that we’re building on.
JofA: How do the enforcement statistics from recent years weigh on policy?
Everson: Clearly, there has been erosion over a long period—through the 1990s to about 2000—in the number of audits and criminal investigations. The IRS did a lot less enforcement at just the wrong time, just when corporate governance was going off track, when a culture of greed seemed to take hold. Mix that with a sad and precipitous erosion in the accounting and legal professions and it made for a bad cocktail.
Over the past two years in particular we’ve been rebuilding enforcement. In the fiscal year that ended in September, we surpassed a million audits of individuals for the first time in four years. And we’ve started to bring back corporate audits, after years of decline. Last year our audits, document matching and collection activities resulted in our collecting $43.1 billion in direct revenues—up more than 15% from the year before. And that number doesn’t include the incremental positive effect on compliance. If we audit Joe, even if we don’t collect any additional revenues, Joe tells his friends, and maybe someone who was thinking about playing it a little fast and loose changes his mind because of the audit Joe went through. That, too, means real money coming in.
These things are starting to trend up. The president has asked for more money for enforcement activities. In a time where deficit reduction is an important priority for the country, the IRS is the only government agency that can make a direct contribution in that way.
JofA: What specific compliance areas is the IRS targeting?
Everson: We’ve established four enforcement priorities, and they’re mutually reinforcing. One is to detect and deter noncompliance, particularly among high-income individuals and corporations. Audits of high-income taxpayers—those earning $100,000 or more—topped 195,000. That’s a 40% increase from 2003. Second is to assure that attorneys, accountants and other tax practitioners adhere to professional standards and follow the law. Third is to augment our criminal investigations to increase the number of tax cases we bring, and also to support other government activities, investigating corporate fraud, narcotics and terrorism. The fourth is a particularly noteworthy one: to deter abuses within charitable and governmental entities and their misuse for tax-avoidance purposes.
Those four are the underpinnings of our strategic plan. They all come together in the abuse of tax shelters by high-income individuals and corporations to get out of paying their fair share.
JofA: President Bush has proposed a $500 million increase in the IRS enforcement budget line for 2006. If you get the money, what will you use it for?
Everson: We’ll use it to strengthen our work in those four enforcement priorities. We’ll add revenue agents to do audits, revenue officers to collect monies due and criminal investigators. We do a good job of covering very large corporations, but we think we can significantly increase coverage right now of corporations with assets of $10 million to $250 million. We need to improve coverage of exempt organizations. It’s not as if we’ll just pick any one thing. We need to run a balanced enforcement program.
JofA: Will the average taxpayer see any benefit in customer service from the additional funds?
Everson: There have been some very dramatic improvements for practitioners on the service side, particularly electronic employer identification numbers and transcripts that practitioners can access electronically. Probably the most important is the electronic filing of returns, which now is commonplace. This filing season we expect more than half of all individual returns to be filed electronically. That’s better for the taxpayer and for the government. Most people still get refunds, and they end up getting a check in just half the time if they file electronically.
But we are tightening our belt to some degree in the customer service area. The deficit pressures are such that the president and the Office of Management and Budget have asked us to manage as efficiently as we can.
JofA: We’ve touched on the subject of abusive tax shelters; they’ve been front-page news for months. How are you dealing with this crisis?
Everson: The government is doing things on a number of fronts. I commend Congress for passing the American Jobs Creation Act signed in October 2004, which put in stiff penalties for those who fail to comply with some registration and list-maintenance requirements. That was a very strong set of actions.
The act also strengthened our Office of Professional Responsibility [OPR], the historically small and somewhat backwater group charged with getting after those who are noncompliant. I want to emphasize that we think the vast majority of tax attorneys and accountants discharge their duties appropriately. But they’ve suffered because of the outrageous activities of a limited number of people. We’ve been doing more in the way of guidance, listing transactions, increasing audits in this area. We have more criminal investigations under way and have recommended more than 3,000 prosecutions, a nearly 20% jump. A big piece of this involves financial crimes, including money laundering and other white-collar crimes, where we work cooperatively with the Department of Justice.
I believe the combination of our activities, the changes in the statute, the congressional climate, the overall changes brought by Sarbanes-Oxley and the responsibility of audit committees is changing the environment. And it’s not only the government that’s going after the promoters of these products; it’s also the marketplace. There have been a lot of civil suits by investors.
JofA: I know you’re keen on professional standards for tax professionals, the Circular 230 change. Can you elaborate a little?
Everson: I started my career on the audit side at Arthur Andersen in 1976, and at that time everyone who was working for a big accounting or law firm knew the job was to make sure clients adhered to professional standards and followed the law. Then, if you could, you tried to distinguish your firm from its competition on the basis of service.
This all mutated over the next couple of decades to a search for higher compensation for accountants and attorneys based on value creation and risk management. So the model moved, to the detriment of the professions and of our markets.
Circular 230 is an important piece of trying to bring things back to a more evenhanded situation and strengthening the Office of Professional Responsibility. We brought in a tough, no-nonsense former prosecutor as director of OPR—Cono Namorato, whose criminal tax expertise is very well respected. OPR investigates allegations of misconduct or negligence against tax practitioners and enforces the standards of practice for those who represent taxpayers before the IRS, as detailed in Circular 230. The office also licenses “enrolled agents,” who are tax professionals meeting certain testing or experience requirements.
The Justice Department is giving us great support on this and sustained us in a number of privilege cases, where privilege had been asserted but was found not to be appropriate. Basically, I think this is a particularly important area for us, and an area where we haven’t been strong enough.
JofA: How will this affect practitioners?
Everson: I think the practitioner community is happy with this initiative, because many good, solid practitioners suffered because of the activities of the few. They had customers saying, “Why should I stick with you, when I could go down the street and end up paying no tax, or paying half the tax?” Most of the people I talk to may have some areas of concern regarding 230, but by and large, they think these are good, sound measures that need to be taken to restore the integrity of the profession.
JofA: The AICPA has partnered with the IRS on ethics training seminars. How do you view this initiative?
Everson: We very much appreciate the dialogue we have with the AICPA and the American Bar Association. We can’t administer a tax system alone. We rely on the work of accountants and attorneys to make sure people get good advice and take proper positions.
We want taxpayers to pay what they owe and no more. So having the AICPA communicate what your members feel is important is a key dialogue for us. We try to meet regularly and understand what the emerging issues and concerns are, and where we can do better.
JofA: What do you see as the role of the CPA in our voluntary tax system?
Everson: The CPA plays a very important role. Individual and business taxpayers rely on their CPAs to give them answers that are correct under the law without causing them to pay more than they have to. It’s a very delicate balance, and one that requires integrity. The tax code is too complex for most people to sort out for themselves.
JofA: In what areas can the accounting profession best work with the IRS to help achieve better tax compliance?
Everson: I wouldn’t suggest there’s any one area, but rather a range of activities. We need feedback on the services we provide, on proposed regulations, on our procedures. Everything we do affects the accounting and tax professions, and accountants and attorneys are part of every process. So it’s not in any way limited to one conversation.
I would like to have a continuing dialogue about compliance and where you see changes in attitudes or emerging problems. You can help us stay ahead of the curve. We’re a very strong organization with a good ethic, but we’re not speedy or agile. Your pointing out any emerging issues earlier would be helpful to us.
JofA: Do you think it’s the sheer size of the IRS that keeps it from being speedy and agile?
Everson: Size is one element. But we’ve also given undue weight to getting precise answers that are always correct instead of getting guidance out promptly—after we’ve figured out about 90% of it—and resolving the remaining issues with a little extra time.
Time counts in this world. People need to know where we are. The IRS culture has been a little risk-averse, and that’s appropriate. We can’t be irresponsible; we can’t constantly be correcting what we tell people. Time is not something we were always cognizant of.
But the failure to do things on a timely basis has hurt us. It has hurt compliant taxpayers, especially publicly traded corporations, to whom uncertainty is a very bad thing. Or, if they’re noncompliant, it’s the government that loses when the process takes too long. So time is a factor that we need to work on, and we’re taking steps to improve our cycle time on things like audits.
JofA: The Jobs Act gave the IRS authority to contract out portions of the collection program. What should tax professionals expect?
Everson: This is an important development. More than 40 states already use private collection agencies for at least one facet of their collection activities. We’re going to do it carefully, with full respect for taxpayer rights and in accordance with both our own statutory governance structure and the Fair Debt Collection Practices Act, to make sure all standards are respected.
We’ll start this summer and ramp it up carefully. I recognize it’s a very sensitive issue. We’re going to make sure we do it responsibly.
JofA: We’re all dependent on technology. Can you update us on the progress you’re making with your modernization initiative?
Everson: When I got here we had a mixed record. We were doing some great things, like electronic filing and letting citizens check the status of their refunds, but we were having difficulty delivering on some of the major systems projects, like updating our core system of taxpayer records and some of our administrative systems. I’m pleased to say we’ve finally started to deliver some capability in the past year. So I think we have turned the corner on modernization. We’re making tough decisions in this more difficult resource environment to prioritize the work we’re doing. We’re making progress.
JofA: Can you share the results of your national research program with our readers? How will you use your findings?
Everson: We’re just now completing our review of this first tranche of research. We took an in-depth look at 46,000 individual returns from 2001 for the first time since the 1988 tax year. We’ll reach some conclusions over the course of 2005, and use them to adjust the way we allocate our resources, the way we conduct our audits, the relationships we look at within returns. I don’t expect any startling changes, because I think we know where the greatest problem areas are from our day-to-day work. But I do think it will provide a very useful foundation for a discussion of the tax gap and of our own internal workings.
This is something we’re going to have to keep working on. The first strip we’ve done is just looking at individual returns. There are a lot of other components in terms of employment taxes and partnerships and other things on which we’ll need to make comparable updates over time.
JofA: What are the most important initiatives the IRS can undertake to improve its relationships with tax practitioners?
Everson: We need to continue to improve our delivery of information, be it online or in our publications, to make sure we provide timely and accurate responses to queries that come in to us. We still don’t do as well as we should in giving accurate answers to questions that are posed to us. We’ve improved our telephone services a great deal; you can get through to the IRS now. But sometimes you don’t get exactly the right answer. We need to do better.
JofA: And what steps does the accounting profession need to take to improve our relationship with you?
Everson: I would like to see the profession do a better job of holding those who get out of line accountable, of chastising them. That helps maintain the integrity of the system.
JofA: Is there any question I didn’t ask you today that you wish I had?
Everson: I would like to talk a little more about the budget. It’s a tough fight in Congress, because we’re in competition with other agencies for the available funding. It’s important that we secure the resources the president has asked for.
The other question is: What is the IRS’s role in tax reform? The president has targeted this as a fundamental second-term initiative. We do need to simplify the code. Complexity is an enemy of compliance; if people can’t understand the code, they’re less likely to fulfill their obligation. I would suggest though that we don’t favor a particular policy option. As policy alternatives are discussed, we need to evaluate them in terms of four different perspectives. First we need to carefully consider the impact of any policy option on attitudes toward compliance; we want to see the willingness of the citizenry to comply improve. The second thing that needs to be addressed is the administerability of any changes.
The third is that as we go through the process, we need to be careful not to evaluate a suboptimized existing system against a perfect theoretical system. You need to make an apples-to-apples comparison, understanding that even things like the VAT or other options that are used in other countries have compliance gaps associated with them.
The fourth point is that if we do make changes—if the panel proposes changes and the administration champions them and the Congress accepts them—we need to be careful in the transition period to make sure they’re done smoothly and implemented well. We don’t want to have the new system get off to a bad start.