Today’s lesson comes from Congress. It is a primer on IRS oversight. It was prompted by an amazing letter I found buried on my desk.
In an October 2015 hearing, House Ways and Means Committee member Diane Black questioned then IRS Commissioner John Koskinen about the lack of IRS responses to 10 GAO oversight recommendations from July 2015.
On October 23, 2015, Koskinen sent her a letter. The letter explained the status of the 10 oversight recommendations. It then also explained the status of 200 additional recommendations from the prior three years, recommendations the IRS had also not responded to. Of the 210 total, 167 had not yet reached their original due dates for responsive actions. The other 43 were late but had received extensions from the oversight bodies who had made the recommendations: the Government Accountability Office (GAO) and the Treasury Inspector General for Tax Administration (TIGTA).
The number 210 is not the amazing part. The amazing part is that the letter explained that during that same three-year period, the IRS has dealt with some 1,240 oversight recommendations just from GAO and TIGTA. That number does not even include the myriad directives and orders from various Congressional oversight committees, nor the yearly Congressional-mandated oversight from the National Taxpayer Advocate. Thinking about the FTE’s needed to address just these 1,240 recommendations makes me dizzy.
I think you will be impressed by the amount of oversight the IRS is subject to; I make no prediction on whether your impression will be good or bad. But I hope today's lesson helps you understand that, as the IRS re-opens with its depleted workforce, it faces more than the tsunami of correspondence from worried taxpayers, and a first return filing season under the wicked complexities of the Tax Cuts and Jobs Act. It must also keep responding to a relentless review of every facet of its operations. Most of the review is done in good faith. Some of it is not, as I explain below the fold. But either way, one can reasonably ask how much is too much. Does the amount of oversight truly make for better tax administration, or not.
The IRS is subject to myriad oversight, from Congressional Committees directly, and from Congress indirectly through various offices that Congress has created whose functions include performing studies of IRS operations and reporting to Congress. I will first list all the sources of oversight, then offer what I think are some take-aways that tie into Koskinen’s letter.
Direct Congressional Oversight
Let’s start with the Congressional Committees. The IRS is under the jurisdiction of no less than seven Congressional Committees, each of which can and do hold hearings and investigate IRS operations.
1. House Committee on Oversight and Government Reform. This is the Committee that held the series of hearings on the IRS processing of applications for §501(c)(4) tax exemption. It continues to hold hearings regarding IRS management issues.
2. House Committee on Ways and Means: Subcommittee on Oversight. This Committee also holds hearings on IRS operations and management. Here's a hearing from last September on IRS Taxpayer identity authentication efforts.
3. House Committee on Appropriations: Financial Services Subcommittee. This Committee regularly holds hearings on IRS administration after each tax season to review IRS performance. I have more to say about this below.
4. Senate Finance Committee: Subcommittee on Taxation and IRS Oversight. This Committee regularly holds hearings regarding IRS administration. For example, here’s a hearing it held last July on IRS administration.
5. Senate Committee on Appropriations. This Committee reviews the annual budget proposal for the IRS. For example, here is a hearing held in June 2018 about the FY19 budget proposal for Treasury and IRS.
6. Senate Committee on Homeland Security and Government Affairs. This Committee had jurisdiction to investigate IRS operations that affect matters under its jurisdiction. For example, it has held hearings regarding the IRS implementation of Obamacare and IRS data breaches.
7. Joint Committee on Taxation (JCT). This is not a Committee that exercises direct oversight over IRS operations. It is chiefly concerned with writing the tax laws. Out that responsibility, however, comes its jurisdiction to oversee the substantive positions taken by the IRS and Treasury to ensure those positions are consistent with the intent of the tax writers. For the great story of how this Committee was created, see George Yin's article “James Couzens, Andrew Mellon, the 'Greatest Tax Suit in the History of the World,' and Creation of the Joint Committee on Taxation and Its Staff,” 66 Tax L. Rev. 787 (2013). Section 6405 also requires the IRS to submit proposed refunds of more than $2 million to the Committee.
The Joint Committee staff is the critical component of this Committee’s review function. In addition to the refund review process, the Joint Committee Staff interacts regularly with Treasury and the IRS. The Joint Committee staff also performs a variety of studies for both the Senate and House tax-writing Committees, and coordinates studies with the GAO. For more details, you can actually read this JTC Report about the JCT Staff!
Unfortunately, I could not readily discover how many hearings these various Committees have held over the past five years. What was especially frustrating was that the Committee webpages are partisan. The party in control of the Committee also controls the content of the Committee's official website and the minority party must park its stuff on a separate website. Some Committees, like the House Ways and Means Committee, at least give the reader a link to the minority's website. Others, like the House Appropriations Committee, do not. That practice makes it difficult for historians and other scholars to get a good overall picture of each Committee's activities over the years. Outside websites also have only partial lists. For example, CNN has archived 131 IRS-related videos since 2013 and 49 involve Congressional oversight hearings. But that is still just a partial list of all hearings.
Indirect Congressional Oversight
In addition to performing direct oversight, Congress has delegated authority to three different federal offices to investigate IRS operations and report to Congress as a whole or to Committees. Two of these offices are 100% dedicated to IRS oversight.
1. Treasury Inspector General for Tax Administration (TIGTA). Congress created TIGTA in as part of the 1998 IRS Restructuring and Reform Act (RRA98). TIGTA is an independent investigatory body, housed within the Department of Treasury, that dedicated to IRS oversight. Many of TIGTA audits are required by statute. For example, it does yearly audits on how well the IRS has complied with some of the RRA98’s requirements, such as the prohibition on designating taxpayers as “Illegal Tax Protester” (FY18 Audit here). And it does yearly audits on the IRS IT programs (FY18 Audit here). Each year, TIGTA publishes its plan for upcoming audits based on both the mandated audits and its evaluation of where the IRS needs the most oversight. Here is the FY19 Audit Plan.
2. Taxpayer Advocate Service (TAS). Congress also created the TAS as part of RRA98. You find it codified in §7803(c). The National Taxpayer Advocate (NTA) is the head of TAS and is statutorily commanded to give a yearly report to Congress. The report must describe: (1) the most common problems taxpayers encounter with the IRS, (2) the issues most litigated in courts, and (3) the most significant difficulties taxpayers have with the tax law. For each of these, the statute requires the NTA to recommend “such administrative and legislative action as may be appropriate” to fix the problems described. The current NTA, Nina Olsen, takes her duties very seriously. Each of her now almost 20 reports give readers a minimum of 800 pages of detailed analysis and recommendations. Because of the shutdown, the 2018 Annual Report is not yet posted, but you can take your pick of all the earlier Reports here.
3. Government Accountability Office (GAO). The GAO performs oversight audits on request from Congressional Committees or members of Congress. For example, in 2018 the Chairs of the Senate Finance Committee and the House Ways and Means Committee jointly asked the GAO to study how the IRS handled the 2018 filing season. The GAO concluded: "Overall, despite multiple challenges including mid-filing season changes to tax law and a computer system failure, IRS met its processing targets for individual tax returns."
1. Inside v. Outside. All of the 1,240 recommendations in Koskinen's 2015 letter came from outside investigators, the GAO and TIGTA. The upside of being on the outside is impartiality. The reviewers have no economic or work-related ties to the people they are reviewing to bias their work. The downside is the potential for a diminished understanding of how the particulars of the narrow investigation fits into overall IRS operations. The classic example is the bungled TIGTA investigation of how the IRS was processing 501(c)(4) applications in 2013. TIGTA's initial report caused an uproar because it found that the IRS office in Cincinnati was using a list of words to "Be On The Lookout For" (BOLO) and that list of words contained words that would identify conservative organizations. It turns out , however, that the IRS office was also using words, such as "progressive" that would identify out liberal organizations. TIGTA apparently failed to identify those because the audit request had asked it to investigation whether conservative trigger words were on the BOLO list. So that's all the TIGTA investigators looked for: conservative-sounding labels. This narrow focus later led to claims of partisanship and incompetence as detailed in this long 2014 letter from Democrats on the Committee.
I don't think those charges are warranted. TIGTA is neither partisan nor particularly incompetent. The better explanation is simply that TIGTA failed to understand the relationship between the Cincinnati office that did the processing and the National Office that was supposed to perform management oversight. The misuse of the BOLO list was, essentially, the result of a pissing match between field and central offices that was about office politics and not national politics. If you are, or were, an insider, you can understand that. Professor Phillip Hackney (who was an IRS attorney in the Exempt Orgs function) articulates the management failures very well in his article, "Should the IRS Never 'Target' Taxpayers? An Examination of the IRS Tea Party Affair," 49 Valparaiso L. Rev. 453 (2015).
In contrast to TIGTA and GAO, the TAS is only a quasi-outsider. TAS has much better sense of the overall tax administration issues presented by any one particular issue. The NTAs reports are quite often filled with recommendations that go beyond the narrow scope of a particular problem. I go into much more detail of this idea in my article "What Good Is the National Taxpayer Advocate," 126 Tax Notes 1243 (March 8, 2010).
2. Duplication and Irrelevance. Some investigations add very little value to tax administration, particularly the ones that a Congress 20 years ago required to be performed yearly. For example, each year TIGTA must investigate whether the IRS is improperly designating taxpayers as "illegal Tax Protestors." In 1997 Congress was concerned that IRS employees were overusing that designation and treating those taxpayers worse than other taxpayers. So it banned the IRS from using that designation (which the IRS had done through a computer Transaction Code designation). The IRS has long eliminated the Transaction Code so there is no longer systemic coding. And IRS employees are trained not to use that banned term. But TIGTA still has to conduct a yearly investigation by reviewing individual IRS employee typed notes. In FY18, that meant that TIGTA reviewed the narrative data entered for about 65 million taxpayers, which involved reviewing more than 30,000 case narratives. In the end, TIGTA found 9 instances where some IRS employee had written in a narrative the banned words. I assume most of that review was the old "Control F" type of review. Still, what a waste of time! But TIGTA will have to rinse and repeat this same investigation next year until Congress changes the law.
The GAO and TAS also sometimes duplicate investigations. For example, it seems like all three offices "investigate" IRS performance for every filing season. Here is the GAO Report for the 2018 filing season. It is generally positive. Here is TIGTA's Report for the same filing season. It is generally negative. You see similar duplication between TAS investigations and TIGTA investigations. At least someone in Congress appears to have actually noticed this duplication. In the last Congress, the House passed a bill called "The Taxpayer First Act." One of its provisions, section 1301, required the TAS to coordinate its investigations with TIGTA. It appears that, with each office running on its own track, TAS and TIGTA simply cannot get it together to coordinate without a Congressional push.
3. Good Faith. I have one last observation, about good faith. I have no reason to question the good faith of the folks from TIGTA or GAO or TAS who investigate the nooks and crannies of IRS operations. They appear to want to genuinely help the IRS perform better, even when the subject of the investigation is some 20-year leftover from hyped-up legislation. In contrast, I do question whether members of Congress sometimes use their oversight powers in bad faith. Let me give you an example that has stuck with me for several years and is the from the same time period of Koskinen's letter.
The House Appropriations Subcommittee on Financial Services held a hearing held March 18, 2015, to investigate why the IRS had issued some $5.8 billion in erroneous refunds to identity thieves. Representative Tom Graves (R-Ga.) asserted that the amount of erroneous refunds was significant because it was “more than half, I guess, of your entire agency’s budget.” Graves also asserted that the IRS issued the $5.8 billion “knowing that $5.8 billion could go to defense, it could go to so many other needs within our country right now….but instead criminals all across the country, if not across the world, are receiving these tax refunds.” I suppose if he held the hearing now, he would say the $5.8 billion could be used to build a big, beautiful wall somewhere. But Graves used these comparisons to pretend to be seriously concerned that the IRS was screwing up big time.
Graves’ office was so proud of his performance that they posted his part of the hearing on www.peachpundit.com. They should not have. The excerpt makes Graves look like a clueless git who is far more concerned with scoring partisan political points with his base than searching for any genuine understanding of IRS operations and thinking about how to improve them. Let's look at it.
First, Grave’s claim that the money erroneously refunded could have gone to some other program is fatuous. There is no direct linkage between money collected and money spent. Congress first must budget for an expense and then it must appropriate the money for the expense. Once it takes those two actions, the executive branch has to spend the money, and if there is not enough money to spend, the executive branch must borrow the money, again subject to broad controls by…Congress itself. It’s not like someone from the IRS says “hey, we found some extra money here!” and runs over to Congress with a check for Congress to immediately spend on those “other needs." You would think Graves would understand that basic budget process, him being on the House Appropriations Committee and all. So he is either clueless or he is being deliberately disingenuous. My money's on the latter.
Second, and more importantly, this excerpt shows that Graves sucks at numbers, which is pretty sad given his committee appointment. His comparison of the erroneous refund rate to the agency’s budget is nonsensical. As best as I can make out, he is suggesting that the $5.8 billion is significant because it is like the agency gave away half of the money the Congress appropriated to it. If that's what he is saying, it's really stupid because at the same time the IRS erroneously refunded $5.8 billion, it was collecting a total of $1.56 trillion in individual income taxes alone (i.e. not counting corporate income taxes, excise taxes, estate taxes, or employment taxes)(see Table 1 on page 3 of the 2014 IRS Data Book). By Grave’s own terms, the agency was not giving away half its budget: it was collecting some 156 times its budget! If you really want to compare dollars collected to IRS budget, study after study shows that every additional dollar allocated the IRS results in multiple additional tax dollars collected. As the National Taxpayer Advocate reported in 2013: ““For virtually every other spending program, a dollar spent is just that – it increases the deficit by one dollar. But a dollar spent on the IRS generates substantially more than one dollar in return – it reduces the budget deficit.” p. 34.
If Mr. Graves was acting in good faith, he would have asked different questions. A good faith oversight question would be “is the IRS collecting what it should?” I figure that $5.8 billion is about 0.04% of the $1.56 trillion properly collected from individual income tax payments. So one could as well say that the IRS properly collected 99.96% of what it would have collected if it had not sent out these refunds. Yes, $5.8 billion is a lot of moola, but it’s a 0.04% drop in the tax collections bucket.
Another reasonable good faith oversight question could be “is the IRS refunding what is should”? That is, measure IRS performance here by comparing erroneous refunds to all refunds made. Again, using the 2014 IRS Data Book, in FY13 the IRS issued $314 billion in total refunds. That makes the $5.8 billion in erroneous refunds about 1.8% of all refunds made. So Graves is pounding on the IRS for correctly refunding 98% of all refunds instead of….what? 100%? Even measuring the IRS performance against what a perfect agency would do is far more reasonable than the budget baseline Graves hurls around.
By almost any measure, the IRS does a great job in getting the right refund to the right taxpayer in a timely fashion. But errors happen. Given the huge amounts involved, even small error rates add up to large numbers. It remains true that the $5.8 is a large number and even a blemish can become cancerous, so the IRS management is appropriately concerned about this situation.
What kind of oversight is going to help the IRS drive that number down and get its proper refund mark up to 99% instead of 98%? The question of why there was $5.8 billion in erroneous refunds that year is a reasonable question. And it is a question that can be asked in any given year. The IRS will never be error-free. But at some point marginal costs to improve far outweigh the potential for marginal improvement.
In this particular hearing Commissioner Koskinen gave multiple suggestions on how the IRS could bring that number down, with some legislative help from Congress. But Graves was so set on painting the IRS as a incompetent agency that he completely ignored any suggestion on how to fix the problem. The “oversight” from folks like Graves is simply not appropriate. It added zero value to tax administration.