Implementation of the Foreign Account Tax Compliance Act and the Affordable Care Act, combined with a tight budget and the possibility of Congress passing a late package of tax extenders, threatens to make 2015 "the most complicated filing season before us in a long time, if ever," IRS Commissioner John Koskinen told Tax Analysts during an exclusive interview on October 17.
The commissioner visited Tax Analysts' headquarters in Falls Church, Virginia, for a 45-minute discussion with Tax Analysts encompassing the IRS's progress on large partnership audits, the outcome of investigations into the Service's mishandling of political groups' tax-exempt applications, forthcoming regulations on corporate inversions, whistleblower protections, and the filing season.
Koskinen said he has spoken with the leadership of the Senate Finance and House Ways and Means committees and that they are sympathetic to the IRS's concerns about late extenders legislation. But he added that while April 15 is a hard and fast deadline for filers, a large, late extenders package from Congress could force the IRS to delay acceptance of returns from some taxpayers into February or March. "That's probably more likely to be the scenario here," he said.
"If we get late passage and complicated changes, what's going to happen is we probably will have to delay filing season to some extent," Koskinen said. "We'll try to open filing season for the average person not affected by those [extenders], but it's going to mean that anybody affected at all is going to see delays related to [making] their filings and for their refunds."
Inversions: Legislation Needed
Koskinen said the IRS is working with Treasury to make sure forthcoming regulations on corporate inversions are clear, understandable, and enforceable.
"If you're really going to deal with this problem, it needs a legislative solution," Koskinen said. "And it needs a solution really on corporate tax reform generally. But even in the inversion area, the problem with regulations . . . is that you're dealing with it piecemeal, trying to put together a more general approach to it, but we're constrained by the statutory limitations."
The IRS hasn't estimated the personnel needs and potential costs of enforcing inversion regulations, Koskinen said. The IRS is now down 13,000 employees from fiscal 2010, he said. "The final bottom line really is, there is a limit to the idea that you can do more and more with less and less," Koskinen said, "and we are well beyond that limit."
Politics: 'Comes With the Territory'
Koskinen said he has "good and appropriate" relationships with members of Congress in general and members of the IRS's oversight committees in particular, ahead of the midterm elections that could place the Senate under Republican control for the first time since 2006.
Koskinen added that he was "comfortable" with House Budget Committee Chair and taxwriter Paul Ryan, R-Wis., who may be the next chair of the Ways and Means Committee, even though Ryan declared at a June 20 hearing that he didn't believe Koskinen's explanation for former IRS official Lois Lerner's missing e-mails.
The commissioner recalled that after confrontational hearings before House committees this summer, "somebody said, 'Gee, you go up and shake hands with people afterwards. How can you do that after you've had this contention in the discussion?' And my sense is, -- and I think it's their sense -- that the hearings have a certain set of purposes and focuses about them, but we're all going to work together going forward. So that even when people are more personal in their attacks than might be normal, my sense is that . . . it comes with the territory."
Whistleblowers: Increase Protections
Koskinen said the IRS has no plans to prioritize audits inspired by whistleblower information in order to reduce payout delays running as long as seven years.
He said the Service has "exciting, important, large cases under audit across the board" and that it's helpful to compliance "for people in large organizations like that to worry that well, you know, a lot of people know about this, and there's a self-interest in somebody actually turning us in."
The long delays in payouts result from the complexity of the cases but also from the fact that the IRS cannot pay until closure, which includes the right of appeal to the courts that can lengthen the resolution time by years, he said.
"One of the issues has been, well, [a whistleblower case] kind of goes into a black box, and you don't hear about it," Koskinen said. "So one of the things we're trying to do within the protection of taxpayer information under section 6103 is at least . . . let whistleblowers know we know they're out there, and we haven't forgotten about them."
He said he favored increasing protections against retaliation for whistleblowers and that he has lobbied Congress for support.
Audits and Change Rates
However, it's difficult to say one case brought by a whistleblower is more important than a similar case not brought by a whistleblower, Koskinen said.
"Our examination process and how we determine examinations is not focused just on how much money we collect, because if we were going to do that we'd just go to large corporations and wealthy individuals and get a better return," Koskinen said. "We do audits of small corporations and middle-class, lower-income taxpayers, recognizing we're not going to get $4 million in a tax adjustment."
In fact, Koskinen said, the purpose of audits and other enforcement activities is only partly to collect money -- the desired effect is increased voluntary compliance. At least some of this year's reduction in the federal deficit was the result of higher tax collections, he said. A 1 percent drop in compliance costs the treasury $30 billion a year, he noted.
"We try to select [cases for audit] by indicators where there will be a change -- we measure the no-change rate," the commissioner explained. "So if we are auditing in an area and getting an 80 percent no-change rate, it means that somehow . . . we're not selecting cases appropriately. But it is important for everyone across the spectrum to feel that the IRS cares about this, they're watching, they're not simply going after people with a lot of money."
FATCA: Not All About the Benjamins
Koskinen also emphasized that the upcoming implementation of FATCA is not solely about how much more money the IRS can put into the federal fisc.
"I've always felt that the problem you have is you can't measure the benefit just by the taxes you collect," Koskinen said. "What you have to do is to measure the benefit by the overall impact on the system generally."
Efforts to combat offshore tax evasion have already garnered positive financial results, Koskinen noted. Offshore voluntary disclosure programs have collected some $7 billion in taxes that the IRS otherwise wouldn't have gotten, while preliminary review by the IRS indicates that in 2011 and 2012, the agency received 500,000 more returns about foreign accounts holding $100 billion of income, he said.
The ability of wealthy individuals and giant corporations to hide money offshore "is corrosive to compliance and corrosive to the system," Koskinen said. People are much more compliant with the IRS "if they think we have data, and they think we actually know something," he said. Compliance rates for individuals have been much higher than for corporations or proprietor businesses because the former had much more income information reported to the IRS, Koskinen noted.
However, that has changed with the new Form 1099-K, in which credit card companies send annual receipts to merchants and the IRS, Koskinen said. "Compliance rates, even without us doing much, have already gone up very noticeably, because again, a lot of businesses and preparers are saying, 'Well, you know, they know you've got all this money,'" he said.
"So I think in FATCA, when you look at it, you won't be measuring just by the amount of money we collect from the people we catch," Koskinen said. "You won't be measuring it just by the increased reporting and money we collect from people who are now with the program. Ultimately, the benefit, again, is protecting the overall compliance rate and the sense of the average taxpayer that it's a fair system."