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Year 1: Rettig in IRS Driver’s Seat, but Congress Has the Keys

Posted on Oct. 1, 2019

Charles Rettig’s stewardship of the IRS through a tumultuous first year earned praise from former commissioners and tax practitioners, who also warned of the one institution that could foil his plans for the agency.

“Underfunding the IRS undermines everything,” said former IRS Commissioner John Koskinen, crystallizing the top concern of the tax community as Rettig’s priorities for the agency come into focus. “Increased enforcement is great, but you’ve got several thousand fewer agents, and until Congress decides to appropriately fund the IRS, a lot that needs to be done will simply not be possible.”

Rettig’s nomination and ascension to chief of the nation’s tax collector in October 2018 was enthusiastically welcomed by most tax professionals. His 35-year private tax practice for mainly wealthy clients, combined with experience with state tax authorities (the California Franchise Tax Board and the state’s Board of Equalization) as well as federal (chair of the IRS Advisory Council, 2008-2010), made tax professionals feel like they had an ear and a voice at the head of the agency.

“He’s uniquely well-equipped to understand what the new law requires, and he’s delivered on that,” said former IRS Commissioner Mark W. Everson. Rettig’s tenure coincided not only with the first full year of implementation of the Tax Cuts and Jobs Act, but also with the 35-day partial federal government shutdown that ended only hours before the start of the 2019 filing season, Everson noted. “If I were in his shoes, I’d be satisfied with the way the agency has discharged its responsibilities,” he said.

After a year in the job, Rettig’s priorities are becoming clear, observers said. Enforcement and compliance have taken center stage, with hundreds of new agents coming aboard, and with Congress offering a $188 million enforcement budget increase after a long period of diminished resources. IRS information technology modernization appears to be advancing, with a six-year plan and streamlined critical pay authority for cyber experts granted under the Taxpayer First Act (P.L. 116-25). Even relations with Congress may be on the mend, with Rettig having conducted more than 70 one-on-one meetings with members over the past year, according to the IRS.

And it is that relationship on which Rettig’s agenda ultimately depends, tax pros said.

Compliance and Enforcement

Rettig’s views on IRS tax enforcement are well known and consistent. In 2002 he told the Los Angeles Times, “The purpose of the IRS criminal division is deterrence. The IRS prosecutes a few cases, they get some publicity, and everybody else falls in line.”

In a September 30 statement to Tax Notes, Rettig said, “The IRS must maintain a visible presence in every neighborhood, based on areas of perceived noncompliance as well as geographic areas around the country. . . . Absent a visible, robust enforcement effort, taxpayers with sophisticated representatives might feel free to pursue overly aggressive tax positions. If so, they are mistaken.”

The enforcement push has taken many forms, including the hiring of more than 3,000 revenue agents last year at the IRS Small Business/Self-Employed Division. But the most significant move, tax professionals said, may have been the division’s changing of the guard, when Eric Hylton was moved from deputy chief of the Criminal Investigation division to head SB/SE.

“In a lot of ways, [Hylton] is the ideal person to head SB/SE if your focus is on enforcement,” said Kathryn Keneally, former assistant attorney general at the Justice Department Tax Division. Hylton is charged, among other things, with improving the agency’s employment tax performance, which accounts for about 72 percent of collections. Former IRS Commissioner Lawrence B. Gibbs added, “Without a doubt I think [Hylton’s appointment] sends a very loud message among the IRS” that the agency will emphasize civil as well as criminal enforcement of the tax code.

Rettig has also homed in on areas of high-visibility tax noncompliance, including cryptocurrency, conservation easements, and microcaptive insurance transactions that have sometimes been used to promote unacceptable tax positions, Gibbs noted. “This is the most dangerous and potentially disturbing type of noncompliant behavior,” he said.

IT and Personnel

IT modernization has been a persistent problem for the IRS, but there are signs that Rettig’s agency is poised for substantial progress.

In April the IRS outlined a six-year, $2.3 billion-$2.7 billion plan to update and expand agency systems in two three-year phases, and got the Trump administration to propose $290 million to start the project. In his statement to Tax Notes, Rettig said digital options “must be expanded without ignoring traditional methods of interaction with the taxpayer and practitioner communities.”

Melanie Lauridsen, senior manager for tax policy and advocacy at the American Institute of CPAs, said her practitioners hope the plan will include a practitioner services division dedicated to helping tax professionals resolve their clients’ tax issues. The AICPA has lobbied the issue heavily, and Rettig sounded sympathetic, if officially noncommittal, in discussions with the group, she said.

Indeed, tax professionals said upgrading the IRS’s technology will be important for much of Rettig’s agenda. “The entire IRS IT infrastructure needs to be updated,” Lauridsen said.

Data breaches were “the thing that kept me awake at night,” Everson recalled, adding, “You can hire and train people fairly rapidly to answer phones, but putting [IT] systems in place to handle all the work, that takes time.”

Tax professionals noted progress in other areas, as well.

Rettig has paid numerous visits to IRS facilities large and small, meeting “tens of thousands” of employees in the process, according to the IRS. “That gets all across the agency” through employee communication grapevines, Gibbs said.

Rettig also lunches in the employee cafeteria every day that he’s at IRS headquarters, and maintains an open table for any employees with comments or questions, several observers noted. “That kind of behavior is meaningful,” Gibbs said.

Everson said, “The agency does respond to the priorities established by the commissioner. But you have to be mindful of your use of the executive talent, and especially IT talent.”

Congress and the IRS

Improved employee relations, better IRS technology, and a sharper eye on tax cheats will all ultimately depend on the largesse that Congress deems sufficient for the cause.

“I think it’s incredibly shortsighted for the nation that the IRS is not fully funded to meet its mission,” Keneally said.

The House wants to appropriate $12 billion for the IRS in fiscal 2020; the Senate is prepared to offer $11.4 billion. The differences will have to be ironed out in conference committee.

Gibbs noted that even the Senate’s offer is $200 million more than the agency got in 2019, and the first GOP-backed IRS budget increase in recent memory. Gibbs and others said Rettig’s one-on-one meetings with members of Congress find him more likely to ask what they want from the IRS, rather than what the agency needs from them. “I thought that was a smart approach,” Gibbs said.

Rettig is now well along in the annual fiscal budget planning dance between the IRS, Treasury, the Office of Management and Budget, and Congress, Everson said. He arrived in October 2018, when the fiscal 2019 budget cycle was already well under way, so for fiscal 2020, Rettig needs to be forceful about his priorities early on in the process, the former commissioner said. “If [the budget] is $250 million low on the front end, it’s not going to get any better,” Everson said.

“It usually takes commissioners . . . almost a year just to know the agency enough to come up with what they want to do with the organization,” Gibbs said. Rettig has managed to avoid getting caught up in the tussle over President Trump’s tax returns, provided cover in part by Treasury Secretary Steven Mnuchin, Gibbs observed, “and I give [the secretary] high marks for that.”

Relations with Congress over time will remain key to whatever agenda Rettig ultimately implements, tax professionals said. “And you have to have resources,” Everson said. “So it’s only after two or three years that you’ll really see the effects, because it takes times to work through.”

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