Tax Notes Today senior reporter William Hoffman sat down with former IRS Commissioner John Koskinen to discuss IRS resources, the agency's enforcement, and President Trump's tax returns.
Read the podcast episode's transcript below. The post has been edited for length and clarity. Due to the length of this recording, the audio has been divided into two parts. Find part two below.
William Hoffman: Welcome, Commissioner John Koskinen. Thank you for joining us today for a wide-ranging discussion on topics of current interest to the tax profession. For our listeners, John Koskinen served as IRS commissioner from December 2013 to November 2017 after a decades-long career as a turnaround specialist for The Palmieri Company. He also served as the nonexecutive chairman of Freddie Mac during the 2008 financial crisis and afterwards, and as chair of the Y2K Commission that helped keep our computer systems from melting down at the turn of the century. He is a devoted soccer and tennis fan and has a stadium named after him at Duke University. Welcome.
John Koskinen: Delighted to be here.
William Hoffman: You've been out of the IRS coming up on two years now. Tell us what you've been up to these days.
John Koskinen: I actually have seen a lot more of my family and my grandchildren. I'm now on an advisory group at my law school, Yale University, and also down at Duke University. I've just agreed to go on the board of the National Academy of Public Administration and I'm helping a small startup. I have a number of things. It's amazing how busy you can get, not even realizing that you're signing up for things.
William Hoffman: Are you working in any of these areas in tax?
John Koskinen: No. The closest is this small startup called Harness Wealth, which is designed to allow people online select from pre-screened investment advisors, tax accountants, and tax lawyers.
William Hoffman: OK. On September 26, the Treasury Inspector General for Tax Administration told a congressional subcommittee that the IRS audits low-income taxpayers more often because it doesn't have the resources for more expensive and complex investigations. That official also said that the IRS wasn't targeting poor people per se, only the Earned Income Tax Credit program whose demographics track closely with lower income working people. Does that reason work for you? Would you have allocated scarce resources to keep collections up even if the effect, if not the intention, was to squeeze lower income taxpayers?
John Koskinen: I think you have to look at that report carefully and the data behind it. The IRS has always made sure that it audited people across the income spectrum. In fact, people at the highest level get audited more than almost anybody. But when you look across the spectrum as the enforcement resources have dwindled, there has been a continued focus on the EITC because of the rate of improper payments. The improper payment rate has always been in the 20 percent level and as much as $12 billion to $14 billion a year is going in probably improper amounts. It's not necessarily going to the wrong people, but it's such a complicated statute that even people trying to complete the returns accurately have trouble figuring out who gets credit for having taken care of the children. There has always been, even when there were more enforcement resources, a focus on the EITC program and trying to get the improper payment rate down. It's not because they're poor, it's because that's a program that is impossible to deal with effectively. I always thought what you needed to do was change the statute and make it simpler for taxpayers, tax preparers, and the IRS to figure out who actually gets credit for taking care of the child.
William Hoffman: The statistics argue in favor of the balanced interpretation that you're talking about. But at the same time, the raw effect of this is that hundreds of thousands, if not millions, of low-income people who, because they left off a number on their tax return or didn't attach the proper paper to back up a claim that was might otherwise well have been legitimate, are being fed into a system where they are targeted more or less by the IRS for these improper payments that may not be their responsibility at all. Does the IRS have any responsibility to relieve that burden, short of the Congress acting to reform the EITC?
John Koskinen: Well, we spent a lot of time. First, it's an interesting program because the IRS on the one hand has an obligation to make sure that everybody who's eligible to participate in that program does. In January of every year we ran programs all around the country trying to make sure people understood if they were eligible, they make sure they would apply. But on the other hand, in this complicated statute, you're trying to make sure the returns are accurate. There were attempts to make sure the preparers understood the calculation to ensure that people filing did it correctly. A lot of times in the cases you cite there, where it's a missing number or a page, those are oftentimes what are called paper audits. You'll get a letter from the IRS and you can correct the mistake by a response back, but it is a program we made a lot of progress in a lot of ways while I was there. The one area we were not able to make significant progress in was lowering the improper payment rate in the EITC. We ran a seminar one day for a couple of days with everybody who had an interest in this — the Government Accountability Office, Congress, and advocates on both sides — to try to collect everybody's best ideas. When the dust settled, it seemed to me the bottom line was you just had to simplify the statute. I've read the statute and it's hard for me to understand exactly how it all works.
William Hoffman: The current commissioner, Charles Rettig, has made clear that he regards both civil and criminal tax law enforcement as an important part of overall compliance. How can the IRS substantially turn towards enforcement and not away from taxpayer services if the agency's resources remain in the $11.4 billion to $12 billion range that Congress is currently negotiating?
John Koskinen: You can always try to be more efficient, but ultimately you can't do it. The IRS basically has funding for taxpayer service, enforcement, and information technology. If you want to increase one without increasing the overall resources for the IRS, you have no choice but to decrease the effort in other areas. At times, it's come at the expense of information technology. Other times, it's come at the expense of not being able to do more in taxpayer service. My point while in office was if you continue to underfund the IRS, you're going to end up doing less with less. You can't do more with less forever.
William Hoffman: What, if anything, does the elevation of the IRS Criminal Investigation Division's deputy chief Eric Hylton to lead the Small Business and Self-Employed (SB/SE) Division signal to taxpayers and tax professionals about the IRS's enforcement strategy?
John Koskinen: I'm not sure it signals anything. Eric's a very talented executive. The IRS has a great history of developing executives by moving them around. In fact, one of the goals we had was to make sure that we broke down the silos in the IRS as much as possible. If you look at the resumes of mid-level and senior managers at the IRS, you'll see that they moved from place to place. I don't think his movement there by itself means that suddenly there's going to be a different kind of enforcement at SB/SE. Enforcement there and the collection activities will continue. I think his biggest challenge will be making sure he's got enough revenue agents and revenue offers to make the system work effectively.
William Hoffman: The IRS plans to phase out all attorney positions from the Office of Professional Responsibility and replace them with non-attorneys who would then be tasked with analyzing alleged violations of Circular 230 and negotiating appropriate sanctions for practitioner misconduct. Does it make sense to give non-lawyers the authority to take away a practitioner's ability to practice before the IRS? Are there risks in this strategy for tax professionals and the taxpayers they serve?
John Koskinen: This is a decision made since I've been there. Going forward, I think the people being put into those positions are very experienced and have been with the agency for some time. I think as a general matter, there's a framework with experienced executives that means that you're not going to see a major shift. But I understand the issue that people have raised that it helps if you've been trained and practiced as a lawyer if you're going to be reviewing practitioners. A lot of practitioners are preparers who themselves are not lawyers. You may end up with people who are more understanding of what it's like to be a non-lawyer as a practitioner. I haven't had discussions with people about exactly which way it's going to work. But the practitioner community is very well organized and I think over the next year or two, we'll get feedback and we'll see what, if any, changes have happened, whether this is more efficient, and whether the practitioners actually are more comfortable with non-attorneys.
William Hoffman: Could the new OPR directive serve as the basis for a lawsuit by practitioners challenging the decision?
John Koskinen: Off the top of my head, I don't think so. I don't know what your claim is as a practitioner as to your ability to select the kind of people reviewing your work or making changes in that work. You may have a complaint about a particular individual, but I don't see a cause of action here.
William Hoffman: The IRS has made great strides against stolen identity refund fraud in good part due to your efforts and the efforts you mobilized at the IRS. Crime continues to morph into new forms, though, and taxpayers and the IRS remain at risk. Do you think there will eventually be a way to permanently secure the system — taxpayers, tax professionals, and the IRS — from refund and identity fraud? And is there an eventual solution more likely to come from inside the tax system or from outside of it?
John Koskinen: Well, you would like to think that someday down the road, the system will be totally secure. As you know, the number of victims of identity theft has dropped by over 70 percent since we put the security summit together, but that still leaves a reasonable number of taxpayers victim to identity theft every year. A number of things will help. People have moved to multifactor authentication so that if you want to do anything very interesting with your bank account or with your investment account online, you'll get a code sent to your either your email or to your cell phone to verify who you are. The IRS is moving in that direction, hampered to some extent because it doesn't have email addresses for all taxpayers and it doesn't have cell phone numbers for all taxpayers. But to the extent you can use that multifactor authentication, I think that's the most significant step forward. Now the challenge is if you could make it increasingly difficult for criminals to successfully hack into the IRS system, they'd go somewhere else where it was easier. In fact, our concern early on was as the IRS got better, the logical next place criminals would go would be tax preparers. Sure enough, shortly after we started having success, we got reports from preparers that their accounts were being hacked. I think the important thing for people to understand is A) the IRS and preparers take this challenge seriously. But B) you should never assume that you're totally secure. I think all of us are well advised to be security conscious and even more so as more and more information is available to people around the world.
William Hoffman: The IRS dropped some FAQ and some guidance on cryptocurrencies. I'm not going to ask you about that directly, but I'm curious: Do you think that blockchain has a future in securing against identity and refund fraud?
John Koskinen: I think the blockchain technology has a lot of promise. As you know, law enforcement officials and others are concerned because it is so potentially secure that they won't be able to get in and they're already having that trouble with some systems. But I do think that increasingly what probably ultimately is going to work best is that people will be better educated and more aware of the security risks.
William Hoffman: You spoke numerous times before you left the IRS about the need for more tax agency recruitment and for better retention strategies for the employees already there. Can you see the IRS making progress now that will make a difference in this later? Could the IRS face a recruitment or retention crisis of the moment similar to the 2019 Tax Day outage? Or is the problem more likely to show up in subtler ways that are harder to identify and treat with the seriousness the problem deserves?
John Koskinen: Basically, my concern was and still is that as you cut the IRS budget and then keep it low and don't even allow for pay increases and others, what you're going to end up doing is not replacing people when they leave. That's how when I started there were 100,000 employees. Now there are give or take a little over 75,000. There are probably a 10 million to 12 million more taxpayers now than there were at the start of 2010. What you've got now is a situation where a very small percentage of people at the IRS are under 30 or under 35 — and what I used to refer to as the baby bust. So, you don't replace people when they leave and you're not hiring new people in sufficient numbers because of the budget crunch. My concern is you're going to wake up in five or 10 years and look for your next generation of first-line managers and middle-level executives and there isn't going to be anybody there. It's not something you can replace overnight. If you haven't hired entry-level people in any significant number for five, six, eight years, you can't hire them all in one year. I think there is a real risk that the cadre of available experienced managers is declining as you're not hiring enough young people and entry-level people and training them as you go forward. Now you can work to become more efficient and we tried a lot of different things — making sure you don't have too much office space, monitoring a paper processing systems, et cetera. You need to do that, but ultimately not having enough people is in fact going to be a problem. Nobody has ever disagreed, even at the height of the attacks on the IRS, that if you give the IRS a dollar, you'll get $4 to $8 in return.
William Hoffman: Does it seem like Congress is getting that message now?
John Koskinen: Well, I think there's this increased recognition. Nobody's talking about cutting the budget. The House proposed a significant increase. It would've gotten you back close to where you were in 2010. The Senate has disagreed, but the dialogue is better. There's less attacks on the IRS and more focus on the fact of if you're not going to fund, then you need to be efficient. I think everybody would agree you need to be as efficient as you can, but there's no way to deny if you step back and look at what the funding was 10 years ago, you would say, "Well, gee, if you can't even have the same level of funding with significantly increased numbers of taxpayers and challenges, something's gotta give."
William Hoffman: A few weeks ago, The Washington Post reported that a federal employee alleged to Congress that there was possible misconduct concerning the routine IRS audits of President Trump's tax returns. You said in September that it would be "astonishing" if the whistleblower were an IRS employee. Now The Post is reporting the whistleblower in fact works at the IRS. What does it say to you about the allegations that someone inside the IRS is willing to risk their career to bring them to light?
John Koskinen: First, let me correct one thing. What I said in September was that it would be astonishing if the person trying to impact the president's return was in the IRS. It didn't surprise me that there was a whistleblower, but I thought it would've been unheard of for an IRS employee not involved in the audit to be trying to influence the audit. I think whether it's in the IRS or across the government, whistleblowers are important to have and protect. If someone is concerned about something, sees something they think is untoward, doesn't follow regulations, or is illegal, it's important for them to say something and it's important for them to be protected. IRS employees, as I've tried to get the public to understand, take very seriously the protection of everyone's tax information. The only people who can look at a tax return are the revenue agent officer, or someone who needs to know or access that return. Anyone else, even if it's looking for their brother-in-law, their sister, or somebody else, it's a firing offense to actually look at a tax return when you don't have a reason to do it. Within that context and in the history of Watergate and everything else, it's always been clear that no one outside the IRS should be calling into the IRS, certainly out of the White House or any part of the administration trying to impact anyone's tax returns and anyone's tax audit, whether it's the president or the guy who lives next door to you.
William Hoffman: How would you grade President Trump on his performance as a tax president?
John Koskinen: There's obviously been significant tax reform passed, the most significant in 30 years. I think on that basis, whether or not you agree with all the elements of that tax reform, it was a serious undertaking that corrected a lot of problems. There are arguments about aspects of it, but I think the administration and Congress did make a good-faith attempt to take a look at the tax code, which hadn't been significantly revised in 30 years, and try to adjust it to present circumstances.
William Hoffman: Should President Trump release or have to release his tax returns? Should all presidential candidates have to release some portion of their returns for public inspection? And perhaps most importantly, should taxpayers grade a presidential candidate somehow on whether they release their tax returns?
John Koskinen: Well, obviously that's the question of the day. There's no requirement that a candidate or a president has to do it. I saw an article recently noting that in the past there have been other presidential candidates in the primaries anyway who did not release their returns.
William Hoffman: No major party candidate since President Ford.
John Koskinen: There are some serious primary people who did not release their returns. I think as a general matter, you can understand that somebody who is running for office may feel that revealing their taxes is private information. The primary candidates out there this year have all released their returns. But what people have to understand is all you learn from tax returns is income deductions against that income, expenses, and charitable contributions. Ultimately, I think you could argue that people are more comfortable with somebody who's going to be running for president if they have some idea of kind of where they've been and where they came from. But again, it's important to understand that you'll learn some things from a return, but you don't learn as much as everybody thinks you learn. You don't learn who they're in business with. You don't learn the details if they have a K-1 or a 990 or the details behind all of that. I've always thought this argument about the president's tax returns, that the returns by themselves in some ways may be a little disappointing. The New York Times had 10 years of Trump's returns from 1985 to 1994 and you didn't learn anything you didn't already know. He lost a lot of money in that period, but that's about all you learned from 10 years. So you could argue, well why doesn't the president just release them? And that's a decision he has the right to make.
William Hoffman: So you do not believe that major party candidates should be required to release their tax returns?
John Koskinen: Well, that's a political issue that ...
William Hoffman: I'm asking you a political question.
John Koskinen: I tend to think that the public is more comfortable if they have a chance to just have somebody review the return. I think it does reveal how much money you made, maybe deductions, whether you lost money, what you made as a charitable contribution. But if you're going to run for president, that's not a lot of information that's overly private. I think that to the extent it makes people more comfortable with the person who's running for president and they know more about them. I think it's probably a good thing.
William Hoffman: Finally, just to put you back in your IRS commissioner shoes for a moment, if Congress had issued you a subpoena to turn over President Obama's tax returns, what would you have done?
John Koskinen: Oh, what I would have done was I would have talked to the Treasury secretary. The statute says that the secretary shall turn over the return. It doesn't have exceptions. The Treasury secretary has delegated tax administration issues to the commissioner. The question then is whether this is a tax administration issue or a tax political issue. I tend to think this particular situation, and it might've been with President Obama as well, if it's part of a political debate going on, it's a political issue that I think needs to be resolved by politicians, not the IRS commissioner. The IRS commissioner is a nonpolitical person running a nonpolitical process. In this case, Secretary Mnuchin, I think to his credit, became the front person for whether they were going to provide the returns or not. He consulted with his lawyers, with the Justice Department, and made a decision. While Commissioner Rettig was copied on things, it was really a decision being made by politicians. I think that's important for the IRS. I think the IRS commissioner ought not to be making political decisions.
William Hoffman: Well, as commissioner you communicated openly with the press. Current IRS leadership seems to be taking a more closed approach. Why did you take the approach you did and is the recent change a mistake?
John Koskinen: My approach has always been the public has a right to know what I was doing and what the organization was doing. When I was an elected official for the District of Columbia, I tried to get all of the division heads in the District to understand that it was important for the public to know what was going on. If a reporter had a question, if you didn't answer the question, you refused to talk to them, then you shouldn't be surprised when your side of the story didn't get into the paper. All you could ask of a reporter was to make sure that they knew what your position was and a good reporter always did that. If there was a problem, there was no way to hide it. It was important for the public to be confident that if there was a problem, people would know about it and you would be trying to address it. That's been my approach from the start of my career. When I got to the IRS, especially with all of the attacks on the IRS, it seemed to me especially important to be available and open to reporters any time they were interested. I thought it was important for the IRS side of the story, the commissioner's side of the story, to be available. It seemed to me that was the best way to get your side of the issue out.
William Hoffman: We have an IRS that communicates mostly through scripted responses when they respond at all. We don't have any kind of interaction with the most senior member of the team, the commissioner. We know that Freedom of Information Act requests are being delayed or denied for what many consider spurious reasons. I'm putting all this together and imagining it going on for years and wondering if it is going to have some kind of effect on the tax practitioners' or the taxpayers' trust in the agency? In other words, how successful can an IRS commissioner and the IRS be when it decides not to communicate with the press?
John Koskinen: Well, I may have spoiled you guys by being readily available at the drop of a hat. I think it's a personal issue of how comfortable you are answering questions on the run. Not everybody is. My predecessor at the IRS was not someone who regularly talked to the press. If you went back and looked at historically at IRS commissioners, probably a good number of them who were tax lawyers or accountants did a good job as commissioner, but were not necessarily readily available to the press. I think you have to say the place runs most effectively if people are comfortable with their role in it and how they're managing it. If the agency has been more comfortable getting questions and having time to think about them and giving back written answers that are thoughtful and properly reflect the position of the agency, you have to respect that. I don't think you can say it's a requirement to be the IRS commissioner or cabinet secretary and be readily available to the press. I think it depends on the person and they have to do what they and the agency at the time are comfortable with. But I understand the frustration of the press. If you can't get an immediate response, it makes your job a little more difficult. You've got to put the question in writing. You've got to wait. Then you can't cross examine the question in writing you get back. But again, I think the agency and individuals just have to decide what's their most effective way of getting you the information you're seeking. I understand for a lot of people the most effective, efficient, and accurate way to do it isn't necessarily doing interviews on the run.
William Hoffman: So now the question that you really came for, the one you've been waiting for -- How is Duke University basketball looking for the upcoming season?
John Koskinen: Ah, good question. I think they'll do well. They've got a good recruiting class. They've got two or three players have been there three or four years. I think they're going to be very, very competitive. I think they'll be one of the half a dozen teams people think have a chance to go all the way.
William Hoffman: Well, we know who you'll be rooting for, so good luck.
John Koskinen: Thank you. Thank you. We need all the support we can get.
William Hoffman: Thank you, Mr. Commissioner for joining us.
John Koskinen: It's been my pleasure.