Tax From the Top: Q&A With IRS Commissioner Doug Shulman

In March 2008, Doug Shulman became the 47th commissioner of the IRS, after serving as vice chairman of the Financial Industry Regulatory Authority (FINRA). Within months, the financial crisis hit and the IRS was given the task of administering a number of new economic stimulus and tax relief provisions, in addition to its recently launched enforcement and information reporting initiatives. On top of it all, the IRS unveiled an ambitious plan to register all paid tax return preparers. Recently, at his office in Washington, Shulman sat down with the JofA to take stock of how, after two years at the helm, he sees the IRS adapting to new realities while fulfilling its traditional role, and how CPAs and other tax professionals figure in its mission.

Editor’s note: The AICPA Tax Division has prepared a briefing on the IRS proposals on tax preparer registration and disclosure of uncertain tax positions. Click here to read more.

JofA: What can you tell CPAs who are concerned about the preparer registration regulations being developed? Will the proposed public database of preparers designate CPAs as such?

Shulman: We ran a very open, transparent, public dialogue about this, which in my personal opinion is how government should work. We asked for and received a lot of input, including from the AICPA and others, which we incorporated into our recommendations. One thing we considered was that even though the CPA test and bar exams aren’t necessarily targeted to tax returns, we will let those be the test accountants or lawyers take, so they won’t have to take another test.

The issue of the database and how people are designated is something we’re going to work through. We’re not going to post the database until after the testing phase. This process is going to be a multiyear effort. I am well aware that CPAs and others have spent a lot of time building a distinguishable professional credential that has a lot of value and means a lot to them and their profession and their clients. So that will be on our mind as we work through these proposals.

JofA: What can you tell CPAs who are concerned about the proposed reporting regime for uncertain tax positions?

Shulman: I tried to lay it out relatively clearly when I announced it. It’s part of the broader theme of information reporting and having a transparent system that is efficient for us and for the tax system. This issue has been on my mind and on the agency’s mind, and there’s been a public dialogue about it for two years. This is one of the first things people talked to me about when I was nominated—even before I was confirmed: What are we going to do about uncertain tax positions and tax accrual workpapers?

Right now, we issue a lot of IDRs [information document requests], rooting around for information. If we get this information upfront, it should decrease the information we have to request and decrease the time of the audit. Right now, we spend anywhere from 10% to 25% of the time in our large corporate audits looking for information rather than doing what I think we should be doing in a voluntary disclosure and compliance system: You report key information to us, and any dialogues or disagreements are about your facts as they relate to tax law, not playing hide-and-seek and trying to figure out what positions you have taken.

First of all, we’re going to affirm the policy of restraint. We are not going to ask for the full tax accrual workpapers—which a lot of people suggested we should do, because we’re legally entitled to them. Instead, we’ve proposed getting a list of positions and the maximum exposure to those positions. We’re not going to get the risk weighting that taxpayers put on each position. We’re not going to get behind the thoughts and analysis by taxpayers about whether they will win or lose with the IRS, and if they lose, what are the chances that they put on that loss and how they analyzed their position. Those are all things we could have asked for and we didn’t. What we do say is FIN 48 is a fact; people already do this work, and we want more transparency. In the conversations I’ve had since we announced it, generally people have said this makes sense; it’s a natural evolution. We expect that there will be a lot of public feedback.

The real question is, what will the IRS do with this information? I’ve been very clear that this is not going to create a target for taxpayers and that we understand that just because you have an uncertain tax position doesn’t mean that’s an amount of money you owe to the IRS. Rather, it allows us to get a head start on picking the right audits and then being able to focus on the issues.

JofA: How is the IRS coping administratively with the many new economic recovery and stimulus provisions?

Shulman: The original mission of the IRS, which was to collect the revenue, has shifted over time, and now we also distribute a lot of money through tax credits. We administer a lot of social programs such as the earned income tax credit and, most recently, a significant portion of the American Recovery and Reinvestment Act. While in one respect it clearly creates some difficulties and burden for us, it’s also a big compliment that we’re seen as a “go-to” agency in government. If you would have thought 10 or 15 years ago that the IRS would be asked to do important things because people thought we could execute quickly, that wasn’t the world we lived in. And it’s really a testament to this institution that over the last 10 or so years it’s really proved itself.

With the Recovery Act, we did everything from quickly getting out withholding tables for the making work pay credit, to getting a lot of money into the hands of homebuyers with the first-time homebuyer credit, to the COBRA provisions to help unemployed Americans keep their health care. I think these are unprecedented times, and I’m quite proud of how we stepped up to the plate and quickly delivered for the American people, for the president, for Congress. But in the long run, what we need is what other big institutions need: proper lead time, policy structured in a way that it can be administered, and then the right personnel and budget resources.

JofA: What can you tell us about processing the estimated 14,700 voluntary disclosures last fall under the reduced-penalty program for foreign financial transaction reporting?

Shulman: For several years, we have been very focused on offshore compliance. When he was a senator, President Obama emphasized offshore compliance and then came in and immediately gave us tremendous new resources for it. [Treasury] Secretary [Timothy] Geithner made this an agenda item at the G8 [Group of Eight summit].

The U.S. government is getting very serious about rooting out offshore tax evasion. And while we’re increasing the risk that you’re going to get caught if you’re hiding assets overseas, we made an offer where people could come in and pay their taxes and interest and a stiff penalty but avoid going to jail. The response was overwhelming. We would have never imagined that 14,700 people would come in.

We are still in the early stages, wading through those returns, looking at information, at patterns of institutions or advisers who help people park money overseas and not pay taxes. Where we don’t have enough information from a taxpayer, we’re digging deeper with further questions and potential audits. This will be a treasure trove of information for us to look for and pursue other wrongdoing.

JofA: Can you say anything about what the government’s next move might be in the UBS case or other foreign financial transaction reporting initiatives?

Shulman: Our offshore compliance effort is a multifaceted and multiyear effort. Probably, the next big thing, I hope, will be passage of FATCA, the Foreign Account Tax Compliance Act. A blueprint was put forward by President Obama in his 2010 budget, and legislation has been introduced by Senate Finance Committee Chairman Max Baucus, [Former] House Ways and Means Committee Chairman Charles Rangel and others. It will require financial institutions doing business as qualified intermediaries to report more information and do more due diligence, so it will give us a lot more and better information. If people don’t sign up to be a QI, there will be withholding at the source.

The president last year gave us funding to hire 800 new people in our international operations. In the 2011 budget that was just put forward, he added funding for another 800 people, so we’re building up expertise. I’m spending a lot of time with my counterparts in foreign governments, comparing notes and sharing information, so international cooperation is being stepped up. We started a high-wealth unit recently, which will look at the web of finances of high-wealth American taxpayers, and that will include their foreign accounts and resources. We are moving on multiple fronts.

JofA: Broker reporting of basis of securities and third-party network transactions both seem likely to generate a large quantity of new information returns. How will the IRS manage processing and matching them to taxpayers’ returns?

Shulman: We’ve gotten better and better at using information returns. Right now we get over a billion information returns; 1099s and W-2s are the most obvious ones. I’ve been very public that the future of tax administration is all about more and better third-party information and continuing to develop our programs to analyze that data and act on it. The way we’re going to get better at handling the volume and complexity of both the Tax Code and the business world and individual finances isn’t by throwing more auditors at the problem; it’s by doing better data management and analysis.

The basis reporting is actually pretty straightforward. We’ll get the information, and we’ll know what your capital gains are. And it will be much easier for taxpayers. Because right now, when I sell a stock, I have to go root around, find the basis and figure out what the capital gain is.

For credit card reporting, we will get merchant transaction data in aggregate. We will build features into our technology system so if we see, say, a pizza parlor that says they had $90,000 of sales last year and it shows that they had $85,000 of credit card sales and we know that pizzerias have a lot of cash sales, that will be a red flag. We’ll use it to better target our audits, to see where there’s potential noncompliance, and then we’ll use it to better focus our resources. We’ll run basic algorithms. We’ll put filters on it, as we do for any information reporting and compliance systems. It actually should allow us to target taxpayers correctly, so in theory compliant taxpayers should have actually less burden on them.

JofA: How well are the enhanced whistleblower award provisions working?

Shulman: It’s still relatively new but an important tool for tax administration. In 2008 we had a significant jump in the number of claims. And then in 2009 we had more claims. The way the law is written is that the case has to go through full adjudication, so if there’s any Tax Court proceeding or appeal, you’ve got to get all the way through it and then the money has to be turned over to the government before the awards are paid out. So this could take multiple years to get the awards out. But I’m a big fan of the program. It can help us identify fraud or tax noncompliance we would have never known about. I’ve been very clear with everyone in the agency that we’re going to execute the program well and within the letter of the law. But stay tuned; we’re still in the early days of it.

JofA: What are the challenges and solutions in upgrading and modernizing the IRS’ taxpayer data systems?

Shulman: Big technology projects are hard, and they’re never linear. You move forward, you learn some things, you scrap something you do, you move forward another direction. For any major financial services firm, any company, that’s how it works. The IRS has been traditionally underfunded in information technology. The president’s 2011 budget recognized that and gave us over $100 million in new money to get our modern account database finished by the end of 2011, ready for the 2012 filing season.

Also, we’re like any big institution that needs to think of its technology as a technology portfolio that has modernization, or new systems, old systems that you’re keeping running and you’re enhancing, basic infrastructure—data centers, hardware and servers—and data security and disaster recovery planning.

We’ve actually done pretty well at running filing season, keeping things running with underfunded technology and with a spotlight on us. Now, though, we are poised to finish what we said we were starting in the late ’80s, which is have all the core taxpayer account data in a single database structure, have faster refunds for anyone who electronically files and gets a direct deposit. One of the historical problems of the IRS is that you’d call up and correct a problem in your account, but a week later, because all the batch cycles hadn’t run, a letter would go out to you, erroneously saying it was still uncorrected. The systems weren’t talking to each other. That will be fixed when we get this done, and we’ll be poised to knock down our material weaknesses and really move forward with Internet, because we’ll have all our core account data in one place. So I would say we’re making good progress.

JofA: When you say “move forward with Internet,” what does that mean?

Shulman: We have some pretty innovative Internet applications, such as “Where’s My Refund?” But if you want to keep moving forward and getting different information and data out to taxpayers on the Internet, you really have to have your core databases in order. And so, this just sets the stage to keep us moving toward more and better Internet services.

JofA: What would you say is the role of CPAs in the tax system?

Shulman: I think of the tax system as an incredibly big, important system that touches every adult American, every business, every nonprofit in the country. And while the IRS is at the center of it, CPAs and other professionals are integral to it. Our country has a voluntary compliance tax system where individuals and businesses are trying to figure out what they owe and send that to the IRS. That means CPAs should be partners with us, trying to help people get it right, trying to wade through the complexity of the law in different business situations. And so I view CPAs as an incredibly important part of the tax system, helping us with both service to the American people and with compliance.

Paul Bonner is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at pbonner@aicpa.org or 919-402-4434.

AICPA Positions on Recent IRS Proposals

Editor’s note: The AICPA Tax Division prepared this summary. Click here for a video update on these issues from AICPA President and CEO Barry Melancon.

IRS Commissioner Shulman’s Announcement on Uncertain Tax Positions

On Jan. 26, IRS Commissioner Doug Shulman released a new proposal that would require companies to disclose “uncertain” tax positions in their annual income tax return filings (based on FIN 48 as required for financial accounting purposes). The IRS clarified that this proposal would not be effective for 2009 tax return filings, but rather is expected to apply to returns for calendar 2010 and fiscal years that begin in 2010.

This proposal has many important implications and will generate much debate. The AICPA recognizes that this proposal will significantly impact members if it becomes effective as initially proposed by the IRS, and we are working on an appropriate response on behalf of our membership. Our task force is looking at both the policy and technical ramifications of the proposal including the impact on the auditor-client relationship, burden on smaller businesses, and ease of administration.

In response to requests by the AICPA and other organizations, the IRS announced it has extended the deadline from March 29 until June 1, 2010 for filing comments. The IRS expects to release a draft of the new disclosure schedule and its instructions in early April, so that the comment submissions can address those documents as well. The IRS has also added to the list of specific questions on which it is seeking comment. The AICPA continues to develop its response. Members who would like to share their thoughts and concerns with us should e-mail comments to MemberinputonAnnouncement2010-9@aicpa.org.

The IRS Announced Plans to Regulate all Tax Return Preparers: CPAs are Exempted from Education and Testing Requirement

On Jan. 4, Shulman announced that the IRS would start phasing in for the 2011 filing season a process to regulate all paid tax return preparers. The proposal that will be implemented through IRS regulations will mandate that all paid tax return preparers both register with the IRS and obtain a preparer tax identification number (PTIN), to be used in signing all tax returns. As a part of this plan, the IRS also will subject paid tax return preparers to an annual CPE requirement as well as an entry competency test.

The proposal generally exempts CPAs from both the testing and CPE requirements as they have already passed a licensing examination and are subject to continuing professional education requirements.

Finally the IRS plans to require that all preparers be subject to the ethics requirements under Circular 230.

We believe having one unique identification number (PTIN) for each tax return preparer and making all preparers subject to the ethical standards of Circular 230 would prove a very positive, resource-efficient program.Under such a program, the IRS would be able to quickly track and identify the incompetent or unscrupulous preparers who are bent on harming the tax administration system.

We do, however, have concerns about providing preparers who are not CPAs, attorneys, or enrolled agents with a “certification” based on limited qualifications and we are particularly concerned with an examination process that may cause confusion among taxpayers regarding the relative qualifications of tax return preparers.

The AICPA has been actively involved in the process announced by the IRS commissioner last summer in which he indicated his intention to undertake this review. We will continue to work with policymakers as the many details of these proposals are disclosed; we have already participated in a number of meetings in anticipation of the release of implementing regulations.We have also engaged members of AICPA’s governing Council at its regional meetings in March to discuss important aspects of the IRS proposal.

Specific details on the proposal are available at the IRS.gov Web site.

Click here to return to the JofA‘s interview with IRS Commissioner Doug Shulman.