United States

What could tax reform mean for the IRS and tax administration?

Aug 07, 2017
From the Tax Governance Institute

Is the Blueprint on a collision course with political reality?

By Timothy J. McCormally, Director, Washington National Tax, KPMG LLP
McCormally currently serves as Chair of the Internal Revenue Service Advisory Council.

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Although much attention has been lavished on the technical aspects of competing tax reform proposals, precious little detail exists on what a post-reform IRS might look like. That fact seems unlikely to change anytime soon.

It is neither unusual nor surprising that few details have emerged. Only once in the last half century has Congress enacted major legislation reorganizing the agency. Even with the confirmation of a new Assistant Treasury Secretary for Tax Policy (David Kautter), we believe it is too early to conclude that any tax reform legislation will include provisions significantly reorganizing or expanding funding for the Internal Revenue Service.

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Tax collectors have never won popularity contests, and for decades pledges to reorganize the IRS have accompanied tax reform proposals. That is the case with the current reform effort, but few details have yet emerged about what a post-tax reform IRS might look like. This is not particularly surprising: Only once in the last half century has Congress enacted major legislation reorganizing the agency.

The Trump proposal and GOP Blueprint

It is neither unusual nor surprising that few details have emerged about what a post-tax reform. Only once in the last half century has Congress enacted major legislation reorganizing the agency.

The Trump Administration’s one-page series of tax reform bullet points does not mention the IRS at all. The GOP’s Blueprint is more expansive, but is short on specifics. Thus, it begins by stating that a simpler Internal Revenue Code will enable Congress to create a “new streamlined IRS dedicated to delivering world-class customer service.”

The Blueprint envisions an IRS consisting of three major units:

  • A families-and-individuals unit focused on providing state-of-the-art customer service.
  • A business unit focused on administering the new code for businesses of all sizes and types.
  • A “small claims court” unit, independent of the IRS, which will allow disputes to be resolved more quickly.

While pledging to provide world-class taxpayer assistance with a team of legal professionals dedicated to providing guidance and information, the Blueprint does not address how the “new IRS” will differ in structure and operation from the old one. For example, the relationship of the small claims court to the current Tax Court (or Appeals Division) is not mentioned. Nor is the agency’s field structure, the role of the Office of Chief Counsel, or the IRS’s relationship with the Treasury Department.

Moreover, unlike the Blueprint’s substantive proposals (such as the Border Adjustment Tax or the provisions relating to expensing or interest deductibility), nary a word has been spoken in congressional hearings (or even in scholarly commentary or the comments submitted by myriad advocacy groups) about the IRS’s structure.

In short, the Blueprint’s discussion about the “new IRS”—which at this point is the only extant material—is neither lengthy nor particularly detailed. This lack of specificity, however, is nether surprising nor unprecedented.

Indeed, prior tax reform efforts—notably, the much lauded Tax Reform Act of 1986—have historically not been accompanied by major structural changes to the tax agency. Despite the language in the Blueprint, that may remain the case. (The Joint Statement issued by the Big Six—GOP congressional leaders and Administration officials—doesn’t mention the IRS at all.)

Prior reorganizations of the IRS

Since the 16th Amendment was ratified in 1913, Congress has enacted major legislation affecting the structure and function of the Nation’s tax administrator only twice. First, in 1953, the agency shifted from a centralized, patronage-based organization to a decentralized one reliant on the civil service. Its name was also changed from the Bureau of Internal Revenue to the Internal Revenue Service.

Forty-five years later, in 1998, Congress passed the IRS Restructuring and Reform Act (RRA98), which mandated a reorganization into four operating divisions aligned according to taxpayer needs. In 2000, that reorganization was implemented, ending the IRS’s geographic-based structure and creating four major operating divisions: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business (now Large Business and International), and Tax Exempt and Government Entities.

Interestingly, some fundamental changes wrought by RRA98 would be revisited by the agency envisioned by the Blueprint:

  • The term of the Commissioner, renamed “Administrator,” would be shortened from five to three years. (Before 1998, there was no fixed term for the Commissioner, though as a presidential appointee, the agency’s head normally turned over at the beginning of a new administration.)
  • The IRS Oversight Board, introduced with much fanfare about bringing private sector oversight and sensibilities to government, would be eliminated. (In fairness, the Oversight Board never achieved its potential and has been moribund for a number of years.)

The significance of the IRS budget

Without more detail about the structure of the “new IRS,” taxpayers and their advisers are perhaps better advised to focus on the implications for tax administration of the agency’s budget.

These have not been good times for proponents of a fully funded tax agency:

  • The IRS’s FY2017 budget is $1 billion less than it was in 2010.
  • The IRS’s workforce is now appropriately 80,000 (compared with 120,000 when RRA98 was enacted), even though the number of returns filed has increased by more than 9 million since 2010 and Congress has imposed significant new responsibilities on the IRS, including the Affordable Care Act and the Foreign Account Tax Compliance Act (FATCA).

These budget reductions have very real consequences. Audit coverage, for example, has declined from 2.5 percent to only 0.5 percent; and proposed adjustments are at their lowest level since 2002. The correlation between the IRS budget and tax collections led Treasury Secretary Mnuchin to testify at his confirmation hearing that he was surprised and concerned to learn that “the IRS is under-resourced to perform its duties,” adding that more resources were necessary to help close the tax gap. Although Secretary Mnuchin’s views did not carry the day in terms of the Trump Administration’s FY2018 budget proposals—the IRS’s funding is again proposed to be reduced—they do confirm the nexus between budget dollars and tax administration.

Concluding thoughts

Even with this week’s confirmation of a new Assistant Treasury Secretary for Tax Policy (David Kautter), it is too early to conclude that any tax reform legislation will include provisions significantly reorganizing the Internal Revenue Service. Unless one is skilled in the ancient art of divination, you are likely better served by focusing on what you will need to render Caesar (and how it is determined) than on how Caesar will collect it.

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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.