Inside The IRS’s Shrinking Band Of Wealth Hunters

Bloomberg Businessweek, Inside the IRS’s Shrinking Band of Wealth Hunters:

Former auditors dish on truant taxpayers, decrepit tech and why $80 billion might not be enough to fix everything that’s wrong.

If you ever meet an off-duty Internal Revenue Service auditor, they probably won’t admit where they work. “What do you do?” is “always a party killer,” says former agent Elyse Katz. Best to keep it vague, she says, and hope that “accountant” is boring enough to move the conversation along to another topic.

Few things make Americans more anxious than an IRS agent in their midst, even when the occasion is social rather than, say, an audit. It’s the audit that inspires many people’s fear of the agency, helping it poll as the least trusted of major federal departments. Last year, when President Joe Biden and congressional Democrats secured almost $80 billion in extra IRS funding across the next decade under the Inflation Reduction Act, it didn’t take long for the agency’s critics to raise the prospect of rampant nosiness, with Republican politicians claiming that an army of 87,000 armed agents would soon be poking through Americans’ finances.

The notion was absurd, to say the least, and not only because almost no IRS agents carry guns. Across the past few decades, the agency has been decimated by cuts, to the point that by most measures it’s the worst-funded major federal department. It’s down to 84,000 (almost all unarmed) workers, a loss of 10,000 employees since 2010 and about the same as in 1974, when the US had 120 million fewer people and an economy a quarter of its current size. The IRS’s most experienced revenue agents have departed at an even higher rate than other employees, leaving 99.9% of the most complex and opaque type of business returns unexamined and millionaires’ and billionaires’ audit rates tumbling by 80% to 90%.

The agency’s diminished profile is the result of a conservative campaign that’s been going on at least since Ronald Reagan became president, thriving through the Trump era even as other core Republican planks fell aside. When the party took over the House of Representatives in January, the first bill passed, on a party-line vote, was an attempt to stop most of the $80 billion from being released.

The IRS has already started to spend that money, with the aim of modernizing and helping it catch tax cheats. “This is our moment in history to transform the IRS,” the agency’s new commissioner, Danny Werfel, declared at his swearing-in ceremony on April 4. Among his goals, he said, are hiring skilled staff to unpack complex returns, upgrading customer service and investing in technology that finally lets the agency interact with taxpayers online rather than via tons and tons of paper.

But employees who’ve been on the job in recent years say more than extra money will be required to restore the agency to some semblance of its former self. Bloomberg Businessweek persuaded more than two dozen recently departed employees to open up about their time at the agency. Many asked to remain anonymous, saying they feared online attacks or professional blowback. Taken together, the ex-employees describe a dysfunctional agency gutted by budget cuts, staff departures and lousy tech, leaving it incapable of enforcing the nation’s tax laws fully and fairly. (The IRS declined to respond to former employees’ criticisms, pointing Businessweek to the agency’s detailed plans to revamp operations over the next several years.)

Even some of the fiercest IRS critics concede that the US needs a functioning tax collector. Although it’s almost impossible to know how much taxpayers are cheating, the agency’s latest estimate pegs the annual gap between taxes owed and paid at nearly $500 billion—almost an eighth of the $4 trillion a year it brings in. And academic studies suggest that the rich have hidden away far more than that offshore and in business activity the IRS can’t easily track. Nor does the estimate account for the impact of new vehicles for tax evasion such as cryptocurrencies.

Meanwhile, Americans with simple finances find it virtually impossible to cheat. Employers automatically report worker income to the IRS, which uses basic matching software to spot any discrepancies on returns. And their simpler returns are, perversely, still relatively straightforward for the agency to audit. In case that ever happens to you, the former employees also offered Businessweek readers a few tips. ...

IRS employees know the agency needs to change. Beyond the day-to-day issues of computer glitches and staff turnover, there are big-picture concerns to be addressed. A Stanford University study released in January found the agency over-audits Black Americans, perhaps a consequence of a strategy of pursuing cheaper audits against the poor instead of resource-intensive investigations of the wealthy. And almost no one is checking on vast segments of the economy, especially the 4.7 million returns filed each year for partnerships that hold much of the top 0.1%’s wealth. Only 3,155 partnership audits were initiated last year, one-third the number in 2018.

The agency’s administrative ranks have “gone through a million planning exercises” thinking about how to modernize the agency, says Natasha Sarin, a Yale professor and former adviser at the US Department of the Treasury. The newest plan, requested by Secretary of the Treasury Janet Yellen, arrived more than a month after a mid-February deadline. The 150-page document lays out a strategy for spending the $80 billion. Priorities include: revamping technology; boosting audit rates on corporations, partnerships and the wealthy; and providing much better digital tools for taxpayers, including alerts when they make simple filing mistakes and guidance on claiming deductions and credits.

The IRS will need to hire—a lot, and not only auditors. The plan calls for adding 19,500 employees in the next couple years, and almost two-thirds won’t be enforcement staff. The agency needs programmers to fix its computers systems, and data scientists and data ethicists who can use artificial intelligence and machine learning to improve the process by which returns are selected for audit. It needs trainers, communication experts and a much bigger human resources staff to find these new hires and guide them through the excruciatingly slow onboarding process.

Former employees stick up for the agency. Many say their jobs were the best they’ve had in their careers. It’s a union shop, with excellent retirement benefits, sane hours and an often collegial culture. Those who faced discrimination at other employers—everyone including ethnic minorities, older workers and graduates of less-than-prestigious schools—report finding the IRS unusually welcoming and meritocratic. The latest figures show that almost two-thirds of the IRS workforce are women and almost 29% are Black—levels far exceeding those of the federal workforce as a whole.

Still, “the IRS is going to need to be creative in tapping into private sector talent,” Sarin says. One innovative strategy, she suggests, would be to hire experienced tax pros from the big accounting firms, which tend to push partners to retire in their late 50s and early 60s. Recruiters for the IRS will have one key advantage, she says: With the new funding, “it’s going to be a really interesting place to work.”