IRS Commissioner John Koskinen has had a tumultuous tenure at the agency since being sworn in to his position almost three years ago. He's recently faced efforts by some House Republicans to have him impeached for his alleged obstruction of investigations into the IRS's exemption application controversy, culminating most recently in the defeat of a privileged impeachment resolution on the House floor. Amid that controversy, Koskinen has continued his crusade to convince lawmakers and other stakeholders that the IRS won't be able to effectively carry out its statutory mandates under its ongoing budget constraints. Koskinen's term as commissioner expires in November 2017.
Koskinen on December 12 sat down with several of Tax Analysts' reporters and editors at the company's office in Falls Church, Virginia, where he addressed the potential impact on tax administration of the incoming Donald Trump administration, the IRS's role in tax reform efforts, and how budget woes have affected the agency's operations.
The interview has been edited for clarity and length. (Related coverage.)
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Tax Analysts: Republicans returned to power with a majority in both chambers of Congress and have been explicit in recent months that the IRS budget crunch will not end until you have left the agency. You've often explained that you regarded your difficult tenure at the IRS as an expression of your commitment to public service. How important is it to you, though, to finish your term under a Congress that has made it clear that it does not want you and plans to undercut your agency every chance it gets?
John Koskinen: I'm not sure that the Congress writ large has made that clear. There have been comments made by some, particularly in the [House] Freedom Caucus, who have led a drive to impeach the IRS commissioner. I have not gotten, in my meetings with a large number of senators and congressmen, that they are holding the agency hostage to my tenure.
TA: Have you communicated with President-elect Donald Trump's people or have they reached out to you?
Koskinen: I met with the transition team for Treasury last week for the first time. I talked to them for about 20 minutes to give them an overview. And then I turned them over to people who really knew what they were talking about, which is the deputy commissioners and my chief of staff, and they spent a couple hours going through things. But in none of that conversation did anything come up about my tenure. It was really focused on the agency, its challenges, and what it would take to allow it to improve its operations, its outreach to taxpayers.
TA: Was there anything in their questions that was enlightening or revealing about how they might approach the administration of the tax agency?
Koskinen: I was not there for the two hours they spent with the deputies, but during my time, one of the questions asked was, couldn't we justify on account of the return on the investment, greater investment in our information technology, which would allow us to be more efficient and run with fewer people? And my response to that was that's exactly what we're doing. It's the only way we can run the place with 17,000 fewer employees than we had in 2010. And it's because things like Where's My Refund? had almost 300 million hits last filing season. And while we don't have 300 million taxpayers -- even if it's only 20 [million] or 30 million taxpayers making an inquiry -- that's a lot of phone calls we didn't have to answer as a result of that application.
So I said it's our position that if we could increase the investment in IT both to protect it and modernize it, but to actually improve our online offerings to people, it wouldn't allow us to provide better service with the same people we have now or even fewer. I always have made it clear, we're not going to hire back 17,000 people; that's not our goal. But even with efficiencies, we probably need more people than we have. We're down over 5,000 revenue agents, officers, and criminal investigators, and there is a limit to how efficient you can become in examinations, audit, and compliance.
TA: Have you met or talked with Treasury Secretary nominee Steve Mnuchin?
Koskinen: I have not. I know a number of his former partners, but have not met with him individually yet.
TA: Have the results of the November 8 election and the incoming administration led to any changes in the IRS's current operations or plans, particularly with regard to the filing season, but also with any other operations?
Koskinen: No, it hasn't. As I explained in my overview to the transition team, we do tax administration. We're not a policy organization. Tax policy is the domain of, as I often say, the Treasury, the White House, and the Congress. So our filing season this year is going to be hopefully as good as it has been recently. And it's nonpolitical. We collect 150 million tax returns -- independent of politics -- at the moment. And so our operations will continue on.
They are subject to the ongoing budget issues that we've had, the challenges of cybersecurity, et cetera, but none of those change because of a change in administration.
TA: But policy does affect operations in a sense. It's clear that the policies of this incoming administration are going to be different from the ones of the previous.
Koskinen: Correct, but those will be tax policy changes. There is a lot of talk about tax reform, tax simplification. And as I told the taxwriting committees from the time I started, we don't have a stake in the policy issues directly; we don't have a position on the policy. What we have a great interest in is, whatever changes you're going to make, we're anxious to cooperate to try to make sure those are implemented in the best way possible, that they're administrable, but most importantly, that there is an improvement that is simple for taxpayers. Because you can draft tax policy and inadvertently create tremendous problems for taxpayers or for the IRS.
So I've made it clear from the start that we're happy to have the policy discussion to be conducted by others, but we're delighted to be helpful in terms of what's the administrative impact of any change you make.
TA: We've read a report that you may have worked with, or for, Trump sometime in the 1970s. Something to do with Penn Central railroad and a hotel?
Koskinen: Yes. I have not worked for Trump, but earlier in my career, the company I was with managed all the non-rail assets of Penn Central, which was at that time the largest bankruptcy in history. And the Penn Central owned and operated four hotels in downtown New York, one of which was the Commodore Hotel that sat on top of Grand Central Station. So for several months, I negotiated with Mr. Trump the sale to him of the Commodore, which he subsequently then converted into the Grand Hyatt, which is still on top of Grand Central Station. So we spent several months negotiating that transaction, and I got to know him well at that time.
TA: Can you give us any impressions of the man?
Koskinen: Well, at that time he was 29 years old, so it's been that long ago. He was irrepressible but energetic, hardworking. He impressed me because it was clear his father had been very successful as an apartment builder in Brooklyn, accumulated a reasonable amount of money. I knew a lot of people in that situation -- sons who became dilettantes or just kind of floated through. And it was clear that Donald was going to make a career for himself. He was anxious to build a company [with] operations on his own. And as I told my son once after my son read The Art of the Deal, you had to understand how hard he worked, how hard Trump worked. I mean, he didn't have a hobby. He worked all day and all night. He was energetic.
TA: Since then, have you had any dealings with him personally or his organization?
Koskinen: I've had no transactions with him. I kept in contact on occasion with him. I talked to him once or twice on the phone. The most recent time I talked to him was probably a couple years ago. Actually, I'm not sure I talked to him. He sent me a note that he'd been on a television interview program and had taken a lot of heat because he had said positive things about me. Last time I talked to him was about 3-1/2 years ago. He called to congratulate me on my nomination.
TA: Following up on the first question, you said that the negative signals you've heard coming from Congress have mostly come from the Freedom Caucus, but we had a story a week or two ago not only quoting Kevin Brady, chair of the House Ways and Means Committee, as saying that he didn't think you had credibility anymore, but also people who were not even in Congress -- think tank people, advocacy group people, lobbyists, and a lot of them even relatively neutral observers -- saying that as long as you're at the IRS, it's going to impair the agency's ability to move on from the targeting controversy. Have you contemplated resignation at any time in the past two years? Do you ever think about it in those terms of, as a public servant and someone who is trying to further tax administration, whether stepping aside would be the best way for you to do that?
Koskinen: I have not considered resigning. I've made it clear, particularly to the employees who care a lot about this, that I am committed to finishing out my term, which, as you know, ends next November. Although as I also made it clear, I serve at the pleasure of the president. And the president-elect will make whatever decisions he thinks are best going forward.
But I think the agency clearly runs better when it has a commissioner as opposed to -- there have been interim commissioners who have been perfectly dedicated, but in the long run, a commissioner provides more of a long-term perspective. At this point, we have a lot of important work to do. And as I say, my sense having talked to a reasonable number of senators and congressman is I don't sense a majority view that the IRS budget is tied to me. The IRS budget started to be cut in 2011, and it was cut for several years before I came. And in fact, last year, as you know, we got an increase in the budget. So I'm looking forward to working with the new Congress and the new administration as long as they are interested in having me.
TA: Do you think that the impeachment threat against you is a dead letter given the recent events in Congress and the House? And do you feel like you ever got a chance or the opportunity to fully make your case against impeachment?
Koskinen: Well, I clearly never got my chance to put on the full case. There was an arrangement struck, that I went to a hearing in September where I had a five-minute opening statement and then I answered questions -- not exactly a full-scale impeachment defense. So I think one of the reasons that there was an overwhelming vote to not proceed with the impeachment vote was the large percentage of the House that felt that I had not been given a fair chance.
In terms of whatever happens going forward, obviously I don't control that. I think it will depend when the new Congress forms, where it goes. There have been some statements made by some congressmen that they think it's now not going to go any further. But that's a decision that Congress will make.
TA: There is not a lot of historical precedent for the attempt that was made to impeach you in your capacity as IRS commissioner.
Koskinen: For somebody in my level, there is no historic precedent.
TA: Do you think that these events that you've obviously been at the center of alter the trajectory or the future of the IRS commissioner's role? Or have you thought that these events would alter how other people in similar roles to yours, in public service, would be able to do their job?
Koskinen: I've been concerned from the start. I mean, we've had kind of a back-and-forth for the three years I've been here, kind of inheriting the aftereffects of the [Treasury Inspector General for Tax Administration] report, which was put out almost four years ago now, 3-1/2 years ago. And one of my concerns that I expressed early on was that if you were in the private sector, where I spent 20 years, and watched those hearings -- if you had an instinct in leadership and doing public service at some point in your career, you might watch those hearings and think that doesn't look like much fun, that doesn't look very good.
And my real concern about taking a privileged motion for impeachment to the floor without the ability of being able to defend and answer back the allegations, if that went forward, would be a real discouragement to people, who would think, well, why would I want to, in the middle of my career or even at the end of my career, damage my reputation or my career to do public service? And I've talked to several members recently on the Hill about the fact that I was concerned less about myself -- as everybody knows, I came out of retirement, what are they going to do to me? -- and more concerned about the precedent, that it would discourage people who had reputations that they prized. Most people care a lot about their reputation. If people can simply take allegations straight to the floor and move to impeachment, it was going to cause a lot of people to think twice.
So I think it's an important precedent that was set, that if you're going to make a kind of an extraordinary motion -- and impeachment is an extraordinary activity -- it should go through the regular order. The respondent should have the full opportunity that historically had always been granted in a handful of cases for presidents and judges to make their case. And I think that's comforting to people, everyone now considering a position with the new administration to say, well, even if some of the members of Congress are unhappy, they can't simply go to the floor and suddenly I'm going to find myself subject to an impeachment court.
TA: Trump's transition team, and Trump himself, and also, obviously, a Republican-led Congress, have been very vocal and very vigorous in talking about their intention to move very quickly on tax reform. And obviously, that could change tax administration a lot depending on what it looks like, especially if we change our tax base, things like that. It will take time to implement the changes, if something goes through Congress and President Trump signs it. But regardless of the plans themselves, there is obviously uncertainty. So from your standpoint, managing an organization that will have to carry this new regime out if and when it passes, what are the practical changes or steps you have to take in how the IRS is run just in anticipation of these potential changes?
Koskinen: We implement statutory mandates regularly, starting recently with the Affordable Care Act, the Foreign Account Tax Compliance Act, the private debt collection act, the health coverage tax credit, the [Achieving a Better Life Experience] Act, and tax extenders and changes in the tax law every year. So we have a long history of regularly implementing changes in the tax code, the tax law, and proceeding.
On occasion, we've been provided with statutory mandates with no funding and time frames that aren't achievable, but we've advised and worked with the Congress on that. Private debt collection will be up and running about a year after the original timeline. But no matter, even with the resources all over the rest of the world, we were never going to make the original timeline. But we have a tradition of being able to do that efficiently and effectively, so there is nothing we will be doing in the interim to gear up to prepare for what may happen. Obviously, as you say, it's a process, and as the process evolves we hope to be involved providing technical advice about how to make sure it's as administrable as possible. And then as the path becomes clearer, we'll start to prepare for it. But it won't be something new for us. Starting with '86, the last time they did a major tax reform, the IRS implemented it in the ordinary course.
So while tax policy, as I've said, is not our domain -- we are tax administration -- I have made it clear that tax simplification would be in everybody's interest. The tax code, as everybody says, is far more complicated than it ought to be. If you could simplify the code, it would be better for taxpayers, and it clearly would make tax administration much easier.
TA: To follow up on something that you said about the IRS's funding, if the funding isn't necessarily tied to you, which is true, the Republicans have been hostile to higher IRS funding since they retook Congress, or at least the House, in 2010. What can you as commissioner do to sort of repair the relationship with the Republicans so you can get the funding back on a more sustainable trajectory? Because clearly there is hostility among Republican lawmakers that goes beyond just hostility to you as commissioner.
Koskinen: My theory about that is that we need to be as transparent as we can. We need to be as forthcoming as we can about what the funding needs are. Appropriators need to know what they're getting for what they pay. The corollary to that is they have to know what they're not getting if they're not paying for it. But I think we need to be as specific as we can, as granular in the detail as we can, to try to give the appropriators and the Congress a clear line of sight as to where we are, what the building blocks are that we're trying to build going forward, what the risks of cyberterrorism and other things are. And then, with as much detail as we can, each program that we're talking about funding.
Our '17 presentation was a very detailed list of initiatives -- initiatives that made clear what the initiative would do, how much it would cost, how you know how successful we've been with them. I've been having those meetings for three years; I've met with over 100 congressmen and senators individually in their offices. [That's] why we began to make progress, and for the 2016 budget got a $290 million increase. That was less than half of what we wanted for those three areas, but I think it was a significant change. It was the first increase in six years. And I think it was in response to detailed conversations we had with the appropriators about the challenges everybody could see about taxpayer services, but also the challenges of cybersecurity and identity theft, the three areas they focused on.
So one of the hopes we had for '17, although we have now a continuing resolution, was that we could continue that dialogue about exactly what the needs are in those areas, what the needs are in IT development particularly and development of better taxpayer services online. And particularly what the expenditures would be. So we provided to Congress -- in addition to the president's budget, within that budget -- very specific guidelines of if you're going to give us another $300 million, where would it go? If you gave us $400 million, where would it go? With as much specificity as possible.
Years ago, I spent four years in the Senate and then I spent three years at [the Office of Management and Budget], so I've seen it kind of from all sides. And my experience is that you do best when you're as transparent as possible, when you're as credible as you can be about exactly how you would spend literally every dollar. As I always tell people, I recognize and appreciate we spend taxpayers' money. That's not money that just grows on a tree and then we collect. We have an obligation to taxpayers to spend it wisely and carefully.
TA: Do you think maybe, though, that there is sort of a trust issue with Republicans? Like the IRS is performing its functions in a nonpartisan way? Do you think there is some repairing that needs to be done there?
Koskinen: There is no doubt -- and I said it when I started -- that the improper use of names of organizations as a way of selecting them for longer, detailed reviews and holding some of them for over two years was a terrible management mistake. There has not been any email that showed anybody got directed into it politically. But even if not, nobody should have to have that kind of level of service. So I apologized at the front end to everybody that got held up in that process.
But most importantly, and I've stressed it for three years, to your point, it's important for credibility not just with the Congress -- more importantly, it's important for credibility with the public. And people need to be confident that if they hear from us, it's about something in their return; it's not anything to do with who they are, who they voted for, what political party they belong to, which church they belong to, whether they go to church or not, what rally they went to in the last month.
Even with only constrained resources, as I've been saying, we'll do a million audits and those million recipients have to be comfortable that it's because of something in their returns, not because of something they said to somebody. And I think as people get accustomed that that's a core part of the IRS's values -- it always has been, even with a terrible mistake -- that kind of trust can be obtained with the public, and I think it will follow that Congress will have that trust as well.
TA: The House Republicans' tax reform blueprint proposes to simplify the tax code enough so that taxpayers can eventually file postcard-sized returns. Is that feasible? And if it is, what kind of effect could that have on the IRS and tax administration?
Koskinen: It's feasible. Whether it's possible or likely or not is a different question obviously. But in some ways there are a big chunk of people who file with the [Form] 1040EZ, in effect, that are filing not quite a postcard, but it's a pretty simple and straightforward revenues and compense issue. They don't itemize deductions, so it's fairly straightforward. A number of states have returns, particularly nonresident returns that are one page, take your adjusted gross income off the federal return and multiply.
Anything that got simple or close to that would be a great advantage to taxpayers and would be a great advantage to us. Clearly, as I've said in the past, somebody has to then look at those numbers and make sure they are the right numbers and all of the right income has been reported, if audit were appropriate, and collect the funds. But it would be a lot simpler if everyone, including corporations, were in that ballpark -- you wouldn't need 80,000 employees.
The question is how close to that we can get. And when you get into the corporate side, it's obviously much more complicated because the facts behind the numbers are always going to be difficult. You know, what's the cost of goods sold when you move property from point A to point B, what was the pricing for that? And so corporate returns will always be more complicated and never quite down to a postcard.
Years ago when we represented Penn Central, we had offices in Philadelphia, and the rule was if you were in Philadelphia more than 50 hours a year, you had to file nonresident taxes, which nobody in those days was doing. And I said, 'No, we're going to do that.' So at the end of my first year I got the return for Philadelphia and then the return for Pennsylvania; they were both one page long. You put in the adjusted gross income, multiply it by a percentage, and wrote a check. As I told people, paying taxes was almost fun. So ever since then, I have been a great supporter of making the tax code as simple as possible, making it as easy as possible for taxpayers to figure out what they owe and to pay it.
TA: Looking back on your last few years here as IRS commissioner, and forward to the time when you will surely be released from this obligation, what are two or three specific, concrete examples of things that you did at the IRS that you would consider part of your legacy? Something that's going to go on after you've left the agency?
Koskinen: I would say -- and I tell employees this, and when I get closer to the end of this term, I'll get a lot of questions, well, what did I do? And my basic answer is, I didn't do anything. Whatever we've accomplished, it's been accomplished with the IRS workforce, which is a great group of people. And in any organization, the head of the organization often gets [asked], 'Well, what did you accomplish?' And they say, 'Well, I did this and that.' And I've always said that's wrong because it wasn't I, it was the agency and its employees.
We've made great progress improving our online options for taxpayers, moving toward a taxpayer account. We just rolled out the balance due ability if you can get through the authentication to actually find out your balance due. You can already pay online. You can do an online installment agreement. You can find out where your refund is. You can get a transcript. Being able to build that in the context of very constrained resources has been a real accomplishment, again, by the IRS employees.
I think the security summit and the fact that the number of taxpayers reporting themselves victims of identity theft this year dropped by 50 percent is a significant step forward, again, because of all the hard work over time that IRS employees have done improving the filters. We have over 200 filters now looking for anomalies.
But I think it's a watershed because it's the first kind of permanent partnership we've had with the private sector and the states. We always communicated and exchanged views with individual companies in the private sector and individual states. We've never, as an organization, sat down and said, 'OK, we're going to have a real partnership. We're not going to tell you what to do; we're actually going to sit down and work together and solve this problem.' And I think that has had a significant impact on the problem of cybersecurity and identify theft refund fraud, but I think it's set a basis for us more comfortably and easily working with both the states and the private sector on other issues.
We're about to have a meeting on country-by-country reporting with interested industry representatives to try to figure out jointly, how do we make this work for them? We've done that with FATCA, with representatives of all the major financial institutions: Here's the system. Here's how it works. What can we do to make it better? And we've had a series of meetings. And so I think the ability and the willingness of the IRS to in fact communicate regularly and openly with external parties is a significant step forward.
But the security summit, I would stress, has been successful because of the great commitment by both IRS employees and very senior and skilled employees in the private sector and in 40 states, 44 states that are cooperating with us.
TA: Is there a project, an initiative, an operation that you either have seen or would like to see at the IRS that nevertheless you are concerned maybe is not going to be finished or accomplished in your tenure?
Koskinen: Well, it won't be finished in my tenure. Probably the thing that's an inside-baseball issue is something called an enterprise case management system. We have a set of divisions, and everybody has cases they select and they manage and they track. We have over 60 of those, most of which don't talk to each other. Many of them are as antiquated as some of our antiquated IT. They've been developed individually by various operations as ways of tracking their work.
And it became clear to me early on, three years ago when I started in Cincinnati with my town halls, that if I sat with an employee working one of those case management systems in Cincinnati in the Tax-Exempt/Government Entities group, called the [Tax Exempt Determination System], a page came up as he was trying to get information, very slowly. It was like a dial-up modem in the old days. And then he got through with that page -- he has a taxpayer on the line -- and the next page comes up very slowly.
So I came back and I said, 'Say, you know, we ought to fix that.' And I was advised, 'Well, there's not just one of those; that's the way they all work.' And in fact, to communicate between the cases, many times what happens when it moves from one place to another, you print the material out, package it up, and send it on to the next division and they take it out, scan it into their system, which means when a taxpayer calls, or even a revenue agent calls, it's hard to know where the case is and what the status is.
So we are building an enterprise case management system, a single system that will take advantage of the [Customer Account Data Engine 2] system, the relational database, and in effect, allow anyone in the organization when they get a call to be able to track exactly what's happened with that taxpayer, with that case. Who was the last person to talk to them? What did they say? Where are the documents? As it moves from one part of the organization to another, whether it moves to collections and then to an audit or to a revenue agent, a revenue officer, that case will automatically be available. It doesn't have to move.
It's a significant undertaking. It will save a lot of money because we won't support over 60 antiquated individual systems. But it will, I think, help transform our ability to deal with taxpayers efficiently and effectively.
TA: How much of an administrative and compliance burden will repealing the ACA be on the IRS?
Koskinen: If you told me what we were replacing it with or whether we're just repealing it, I could answer the question better. Obviously, the Affordable Care Act has taken a significant amount of time and effort. I tell people, over the last three years, we spent $300 million a year just on IT alone, and none of that money was provided to us, so each year we took $300 million out of other IT projects or other efforts to fund it. So it is a big, complicated system. We now collect data from large corporations and insurers on the insurance they provided individuals month by month. We do reconciliations of premium tax credit payments made by several million taxpayers.
So it is a system now up and running, and so I kind of hate to see it go away because we put so much into it, but we're prepared to do that. And we're prepared to adjust it, fix it, get rid of it, replace it with something else.
Again, I think our point is, we don't have an argument one way or the other as to what that system is in the sense of its policy. We have a great interest in trying to make sure it runs well. I hope that as people look at it, they'll take lessons learned from just what are the complexities in the system now, and as you move to a new system, how can you simplify it and streamline it to the extent you can? But as I say, there isn't a clear line of sight yet as to if you replace it totally, what you're going to replace it with. Are you going to adjust parts of it? There have been moves to deal with some aspects of it. And again, I think it's a complicated system as it stands now; trying to replace it with another system will also be complicated. Even if you make a lot of block grants, you'll still have a lot of complexity to it. But as I said, I can't tell you exactly what it's going to look like until we know more about it, but we're prepared and willing to make the changes as they come along. But when you start talking about health insurance for the United States, it's a big, complicated area, and the system inevitably will be more complicated than anybody would like.
TA: Can you give us a sense of how many people work at the IRS, directly or indirectly, on ACA-related matters?
Koskinen: I can't off the top of my head. But basically what happens is with the Affordable Care Act now, we've had three years, a steering committee on business and technology and other people in the agency that I've met with every two weeks. Within the last year, I've moved it to once a month as it gets established. We're about to phase that oversight committee out because we're folding all of this -- because there aren't new developments -- into the regular filing season. So at some point, pretty close to now, it will be just part of filing season. People will give information in the enrollment period out, which basically goes pretty automatically. People will file returns, and one element of the return will be, did you have insurance? If you didn't have insurance, are you making a shared responsibility payment? You got a premium tax credit advance; here's a reconciliation page.
So there's an incremental audit review function in that, although a lot of it's automated, but it will be less than we've had thus far. A large number of people working have been the people designing the systems, the people working through with all of the communication back and forth with all of the industry groups that we've had to deal with. So ironically, as we get to this stage, we'll have fewer people working on ACA going forward now because it's all implemented. It's just an incremental work stream built into our annual filing season.
TA: Any idea, down to maybe the tens of millions of dollars, of how much money has been invested in this that would then be basically thrown out if the ACA were repealed?
Koskinen: We've spent, as I say, well over a billion dollars just on the IT element of it. And if you said we're never going to do anything with healthcare at all, some majority of that will have been wasted. Some portion of it, though, is built into the system and it's helpful in other ways. But I would say the majority of it, if you just did away with it, would have been money invested in a system that we're not using anymore.
TA: Part of the tax reform discussion has been exclusively about aspirations, and although these aspirations have been explicit, so far they have not been very detailed about restructuring the IRS itself in a direct, purposeful way. So not just its activities but how the agency is structured as part of the tax reform blueprint that the House put out, for example. Is that something that's on your radar? But also, have you offered feedback to people in Congress or to the administration's transition team about what that restructuring might look like or what you think it should look like?
Koskinen: The transition team did not ask that, and I haven't been asked by Ways and Means for a response to the blueprint. But again, if you want to restructure the place, we're delighted to work with people. The blueprint is primarily focused on having the IRS be focused on taxpayer service. It leaves open the question of, does that mean we don't do any enforcement? There's no mention of criminal investigation or any enforcement action. It doesn't mention anything about the taxpayer advocate. Do we still keep doing that? There was no mention about whistleblower programs or other aspects of it which tie into more enforcement. There's a position that what you ought to do is have a sort of small claims process, and it's not clear whether that replaces the Tax Court or does that replace the Appeals function? But clearly, having taxpayers having an easy way to raise objection to disagreements is built into the system now, and if people want to discuss how to make that more efficient, we'd be happy to have that discussion.
TA: One of the most extreme accusations leveled against both of the major presidential candidates in the election is that they would have used executive power to target their political enemies. Now that the election has been decided, how do you reassure the American people that the IRS will not become an instrument of such abuses?
Koskinen: There is a long tradition ever since, really, Watergate that the IRS is not political, needs to be nonpolitical, ought not to be used by anyone to direct attention to any particular taxpayer. That's one of the reasons in the [Internal Revenue Service Restructuring and Reform Act of 1998] to have the IRS commissioner have a five-year term, was to stress first that the commissioner ought to be prepared to be there for a while, but secondly, that it wouldn't be coterminous with the presidential turnaround so that it wouldn't necessarily be viewed as one of the political appointments that has to be made right now. Every 20 years, of course, it would show up at the same time, but I think the point there was trying to send the signal then that the structure, that the IRS should be viewed independent of the presidential elections, independent of the politics.
Going back to an earlier question, that's why I was so concerned when I started about the allegations that the terrible management problems had been encouraged or directed for political reasons. And nobody has paid too much attention to it, but there's been no email, certainly no external email into the IRS and no internal IRS email identifying politics as anything behind the management mess. The IG report has none of that in it. The Justice Department afterwards did an investigation and found no political motivation. I think it's important for that to be viewed and publicized by the public to understand that even when there was a mistake made and people who were not treated well or not treated fairly, that it wasn't about politics. So my sense is there's a great tradition insulating the agency against political interference, and I would hope and assume that that would continue, and I have seen no indication in the campaigns or otherwise that there was anyone who thought that that would be part of their way of acting.
TA: Forbes recently wrote that because the Statistics of Income division within the IRS is no longer releasing its data sets on the top 400 taxpayers -- the 400 with the highest adjusted gross incomes -- we'll never know how much tax cuts in the Trump administration would affect those top 400 taxpayers. Given the potential for any tax reform to have a dramatic effect on taxpayers across the income spectrum, to what extent can the SOI division and its data provide an answer to those asking who benefits or who doesn't benefit?
Koskinen: The Statistics of Income [division] provides you a broad spectrum and great detail of tax returns every year. And while it may not identify the 400 for the Forbes people, it does identify by brackets, and in fact there was notice recently about the increase in income by the top sector of the spectrum. So I don't think it'll be hard for anybody to figure out, once you know what the tax reform proposals are, who is going to benefit and who is going to pay for them. And part of the basis will be the detailed information that's been put out every year for a long time. In fact, I'm going to a 100-year celebration for the Statistics of Income publication next week.
I asked that question when I got there. I said, 'What's that got to do with tax administration? You know, academic research is fine, but we've got budget problems.' And then when you looked at it and said, no, but it's fundamental for people to know exactly where do the revenues come from, who pays for them, what would be the impact of changing one aspect of the tax code or another?
So we've been at it for 100 years, and we'll be at it for hopefully the next 100 years.
TA: The IRS budget has been cut more than $1 billion since fiscal 2010, both as part of sequestration and from Republican concern over the perceived treatment of tax-exempt organizations. Removing the fiscal 2010 baseline and the political constraints of deficit reduction that were incorporated even before the sequester, in a perfect world essentially what should the IRS budget be? If your agency, instead of being a hated tax collector, was a corporate collection department, what would its budget be?
Koskinen: That's a good question. I would think right now this year the president's budget has been vetted by the Treasury Department, by OMB, and presented to the Hill, and that would be probably the most thoughtful presentation of what it should be. I've always said, if you could ever get us back to where we were in 2010, we would be able to, I think, run efficiently and effectively. We've got 10 million more taxpayers since then. We've got all of these unfunded mandates we've had, but we've also made a significant efficiency, so we can do more with less. As I said when I started, there's a limit, though, to when that expires.
So clearly, our problem is that even at flat, we estimate there's $175 [million] to $200 million of inflationary and pay increases we have to port. Over 70 percent of the budget is people, and the pay raise is terrific for our employees, but we then have to figure out how to pay for it as we go. So I think if you gave us the president's budget this year, I think it would be a significant step forward for us as we go. The president's budget wouldn't necessarily even get us to 2010, but it would make a significant move in that regard.
As you say -- and I've been saying since my confirmation hearing almost three years ago to the day -- I spent 20 years in the private sector and never ran into anyone who said, 'I think I'll take the revenue arm of my enterprise and starve it for fun and see how it does.' And nobody has disagreed in my three years -- even the most vigorous opponent of the IRS -- with the idea if you give us a dollar, whether it's $4, $6, $8, or $10 back, you get much more money back than what you gave us. And in a context where the OECD every two years puts out an analysis of tax administration around the world -- a big, thick book -- when you look at it, we are by far the most efficient tax administration in the world, with a couple of small-country exceptions. Canada, Great Britain, Australia, France, Germany, all spend up to two or three times the amount to collect a dollar of revenue we do.
So our budget needs to be viewed in the context of, if you look at it comparatively -- it's apples and oranges to some extent -- but just as a general matter, we already are extremely efficient at what we do. Now, we are also extremely challenged, and as I've noted in a couple recent speeches, I've been concerned that we have run long enough with constrained resources that it's beginning to threaten the ability of the agency to function. It's not just that we're down over 5,000 revenue agents, officers, and criminal investigators. Our antiquated IT systems are starting to fail more regularly.
Somebody asked me recently, they said, 'You sound even more vehement about this.' And I was quoted as saying, 'I mean it.' I just don't want anybody saying three years from now, 'Wow, if I'd only known how serious it was, we might have provided more funding.' It is very serious in terms of our ability to deliver on the mandate, and that mandate is important because we collect $3.3 trillion a year, and that's what funds the place.
TA: You've talked a number of times about your concern about the exogenous effects of various things on tax compliance, what outside the tax system could affect that. Are you concerned about the effect on tax compliance of having a president who publicly stated repeatedly that he did not pay federal taxes and that he's a smarter guy than the rest of us for having done so?
Koskinen: No, I'm not concerned about that. I think people understand, and I think his position has been, that that's what the tax code allowed him to do. He simply filed under the tax code.
I think what's important for people to understand is that the system is fair, and that's why enforcement is important. People, when they write their check, have to figure everybody is paying their fair share under the code. What people are concerned about are not people filing appropriately and whatever their tax rate is under the code; what people are concerned about are the people not paying taxes at all. And I've always said the Foreign Account Tax Compliance Act is important, not just because of the several billion dollars we collect; it's important because the average taxpayer now can say, 'If I were rich and had a fancy tax accountant, I no longer could hide my money somewhere and pay no taxes on it.' So I think what goes to the fundamental tax compliance of the system is people feeling that it is fair.
Now to the extent that the code itself produces inequalities or disparities, then that's important, but I think people understand that's a decision that Congress has made, and if you can take more deductions doing one thing than another, they may not think of that as fair to them, but they don't think the system is unfair. So I don't think the new president was saying anything about taking unfair advantage of the system; he was just saying, and he made it clear, that's what the code allowed, and in fact, he wouldn't mind changing the code.
TA: What is the IRS's strategy to mitigate distributed denial-of-service attacks, or DDoS attacks? Botnets powered by 'internet of things' devices, like security cameras or routers, seem to be a growing threat, and the heart of the filing season is only a couple months away. How is the IRS preparing for online attackers' attempts to disrupt the filing season using DDoS attacks?
Koskinen: We've had denial-of-service attacks for some time. [Former IRS Chief Technology Officer] Terry Milholland told me about a year ago that we are attacked over 1 million times a day. And I said, 'I can't say that number; it just sounds too big.' And then he told me about six months ago, just before he left, the attacks were up to 4 million a day. That would explain it. Well, then I could say 1 million because it's a very conservative estimate.
It is a serious problem. One of my concerns about our somewhat antiquated system is will it be able to continue to function on its own? And will we be able to continue to fend off? We have monitoring systems. We got pushback against the IRS attacks, but nobody has a guarantee that everything they've got is going to work perfectly. But it's not a new phenomenon, and it's been around for a while, and we've got monitoring systems and state-of-the-art systems to repulse those attacks, but it is something we live with literally every day. And I think, as Terry and I used to talk, the only time you're in trouble is when you think you're not in trouble, when you think that you're secure. You just have to assume every day that today is the day there's going to be a problem, and what are we going to do about these problems?
TA: A lot of organizations have found themselves flat-footed because the most recent DDoS attacks have been an order of magnitude in some cases above what organizations were prepared for. So did the IRS update its DDoS mitigation capability recently?
Koskinen: Yeah, we on a regular basis review. We work with Homeland Security. The Treasury Department now has all of its agencies working together on security. So we've tried to stay as state-of-the-art as possible. I told people we're not making trade-offs about security. One of the issues about our increased authentication, multifactor authentication is it's made it harder for taxpayers to get in. And we used to talk about balancing taxpayer inconvenience and security. I said, 'We can't talk about balancing that anymore. We cannot afford to have any security breaches.' So we're not balancing anymore. We'll do whatever it takes to secure the data and protect taxpayers, to protect the systems.
TA: Despite bringing back $10 billion in taxes, interest, and penalties, and more than 100,000 taxpayers coming into compliance, on several occasions -- at conferences, and I think in response to a TIGTA report -- the IRS has indicated or emphasized the nonpermanence of its offshore voluntary disclosure program. Why would the IRS consider terminating or unwinding the OVDP? And if such a thing was contemplated, would there be advance notice?
Koskinen: We're not contemplating it. In fact, I just had a conversation earlier today about how to expand and modify it and improve its operation. Part of the reason people think about why don't we wind down is because we've done a lot of work looking east, particularly in Switzerland and other places. People say, 'Well, you must be running out of possibilities.' If you just turn around and look west, we've got Hong Kong, Singapore, all of Asia where a lot of people have engaged in the same kind of activities they engaged in in Europe.
So we have a lot of targets of opportunity out there, and one of the questions is, how can we encourage people to become compliant? And as we start to turn our attention to gaining data and access to data in other countries and simply in Europe, I think we're going to find a whole lot of other taxpayers, and some are going to be in the same position. So I think we're a long ways away from moving away from the voluntary disclosure program.
One of the reasons people have talked about winding it down is trying to encourage people you've got to get in. At some point, it's going to end and then you're going to be stuck with the normal process and you don't want people saying, 'I'll just wait as long as I can.' And so the real incentive, though, is if we find out about you after we know you exist with the banks, then the penalties and the implications go up significantly. I think that's more of an incentive for people, and so maybe the word would go out. There are other banks in the world and other areas in the world than just Europe, and people who are maybe hiding money in other places ought to take advantage of that disclosure program, because we're coming.
TA: Related to that, does the usefulness and information coming from FATCA play a role in deciding how the OVDP will be formulated going forward? The GOP platform has mentioned repealing FATCA. How would that affect the role of the OVDP and streamlined filing compliance?
Koskinen: Well, FATCA by itself is a more regular way of collecting data from companies. If you repealed it, we're still involved in increasingly international exchange of information developments. We're going into country-by-country reporting for corporations next year. So we will continue, with or without FATCA, investigating banks and operations around the world, but I think FATCA has again become valuable for people, and I'd be surprised if it got repealed at this stage because it's now up and running. And I think most people understand all it's doing is saying, wherever you are, if you have U.S. tax obligations, you need to meet them, and you can't simply forget about them or ignore them. And a lot of FATCA isn't international. A lot of FATCA is domestic noncompliance. A lot of people engaged in hiding money in Switzerland or the Cayman Islands live in the United States.
So I think it's an important area for us to continue to pursue. But back to the earlier question, it's important for taxpayers generally to know we care a lot about everybody paying their fair share, and anybody who is trying purposefully to avoid the tax code and their tax obligations, we're unhappy with them. We're going to chase as long as it takes. If you're trying to become compliant, we'll work with you. But if you're trying to avoid taxes and not be compliant, then we're going to actually keep chasing you.
TA: On May 6 the IRS said it would no longer allow field audits to be initiated by phone or be launched by phone. However, whether that new standard applied to all other IRS interactions with taxpayers is unclear. Are there still scenarios in which the IRS authorizes examiners or other IRS employees to initiate contact with taxpayers or their representatives by phone without first sending an initial contact letter?
Koskinen: No, and I was surprised when we found out that there was that window where rather than writing a letter, people were just -- and all they were doing in those calls was setting up a meeting. But again, as soon as I heard that I said, we can't be on the one hand telling people if you're surprised to be hearing from us, you're not hearing from us, and then surprise them when they heard from us.
We obviously call people a lot once we've engaged with them, but out of the last couple years as we've been fighting phone scams, that's the only example that's come up where there actually was not compliance -- even just a question of people setting up meetings, but the issue was raised, people were very nervous about that, and it was inconsistent. And I thought that was a good point -- we ought to make it consistent that we don't call without a letter in advance. The irony is that policy was not followed necessarily all the time, and in fact the people using it were concerned that people weren't calling. They were writing letters, or were not as efficiently contacting taxpayers. So now, even those people get letters. But there's no other place I know of where the first contact from an IRS agent will be by phone.
TA: So it's just a universal policy?
Koskinen: It's a universal policy.
TA: We recently sent a reporter to cover some Treasury officials at a tax conference, and he was denied entry. He was told to get off the premises. And Cara Griffith, our vice president for editorial operations, wrote shortly after that that IRS and Treasury officials should not accept speaking invitations to events that are closed to the press. Paul Streckfus of the EO Tax Journal, who used to work here, has also asked you not to allow IRS employees to speak at events that are closed to the press. Can you give us your thoughts on that?
Koskinen: I had not heard that was an issue. Wherever I go, the press is welcome, and so I'm happy to pursue that. As a general matter, there are times when we have conferences that we're meeting with taxpayers where the press is not there, but if we're going to make presentations, there's no reason they should be closed. My sense is, whatever we're telling one group of people, we ought to be able to tell everybody. We shouldn't be favoring people by saying we're going to come and talk just to you so you'll know something that somebody else doesn't know.
We're very careful about trying to make sure we don't favor a group or a set of groups. So for instance, in meetings I talk with the private sector, the people we bring in aren't individual companies. They're organizations representing a broad collection of either private sector people or banking people and they're open. If somebody else says they'd like -- the security summit has grown by people saying, 'You should have us involved.' And we said, 'You bet.' And so nobody has been excluded.
TA: The IRS has said it's reviewing its policies on user fees. OMB Circular 825 says that user fees must be charged for 'special benefits' above and beyond the agency's fundamental mission of tax collection. How does the IRS designate a service as a special benefit? Are you satisfied with the process by which services are designated special benefits as sufficiently inclusive and transparent?
Koskinen: We actually do that every two years. The OMB circular requires we look at all user fees and all operations every two years. When we have a proposal, it gets reviewed and cleared by the Treasury Department and then reviewed and cleared by OMB. So it's not just our decision; it's a decision made across the board. We have to justify if we're not going to charge the full cost to Treasury and OMB and get a waiver. I think it has a lot of checks in it, both because it's reviewed externally and it's got a history of fees. So the user fees that are out there when we're adjusting them are fees that have been user fees for some time. We have not charged anything that I can remember off the top of my head as a new user fee recently.
But as a general matter, it's a very careful process that takes about a year, and then ultimately, the user fee gets published for comment. The enrolled agents are unhappy with the increase of their user fee that we are no longer going to subsidize. And we got a public comment. They raised questions about how we calculate the cost, and we've gone through to try to make sure that the costs are calculated the same way for each user, that there's not a different process. I mean, the number of people working on them is different, but you could go through them all and the process would be the same whatever the user fee was.
TA: One argument that I'm sure you've heard made by the organization you just brought up is that not only are you no longer subsidizing these fees, but you're using the totals collected to seal over holes in the IRS collection. What's your response to that?
Koskinen: My response to that is we're charging for the cost and nothing above it. We're not allowed to charge anything above it, and OMB reviews that when we make that proposal and we provide the cost data. And in fact, we adjusted that fee when the question was raised, is it the same process across the way? And we went back and double-checked and said no. OK, to make these consistent, that fee is actually going to decline by about 10 percent. But it was still lower than it was before. They still thought it was too high, but we're not allowed -- we have to charge full cost, but we can't charge cost-plus. The OMB regulations are that you can charge full cost but we're not allowed to charge more.
TA: And if you collect more in the process, then what happens to that overage?
Koskinen: I don't know if anybody's ever been able to collect more than the cost in the process, but the technical issue would be you'd be inappropriately increasing your appropriation. In other words, if we're going to get money to run beyond cost recovery, it has to come through an appropriation process. So if we actually had a cost of $100 and collected $125, the $25 would actually be returned or put into the general fund. We would not be able to spend an overage.
TA: Back on the Statistics of Income division, what sort of trends do you foresee in the IRS's use and dissemination of data that's of interest more to the taxpaying public given what seems like increasing public interest in these type of statistics?
Koskinen: The people running the Statistics of Income [division] have done a great job over the last four or five years of increasing the visibility and the availability of the information, trying to make it more readable. A couple years ago they came in and showed me the report and had charts that were kind of more interesting and a little more summary of data. They've got it up on a website, so it's easily accessible. I don't know of any new initiative of any significance. I think their goal is to continue to try to make the data as useful as possible and as inclusive as possible and as readable as possible.
So there's no major change coming in how they operate, but we do understand that people are very interested in those numbers. They're put out by a separate division and the numbers are what they are, and nobody influences [them to] put them in a different way. We just simply put them out.
TA: Regarding the individual taxpayer identification number program, I've been told that your response rate to the 400,000 letters you sent to holders of expiring ITINs has been 16 percent. Do you plan expanded outreach programs to boost that response rate up among folks who have statutorily expiring ITINs?
Koskinen: Yeah, it doesn't surprise us. Most people don't pay attention to taxes until it gets ready to file, and so our concern from the summer -- from the time the statute was passed -- was how do we get the message out? As I told people recently internally, the marketing studies [say] you have to make seven impressions before anybody hears you. So we have been flooding the zone trying to get the word out, and one of the great things about the security summit is we've got tax preparers and practitioners and software developers and everybody, and we're trying to get all of them geared up to talking to their clients and telling them now is the time to start focusing on getting your ITIN renewed. Don't wait until you're getting ready to file. And so some of our releases recently you may have noticed are a little longer than normal because we've stressed the impact of both the delayed refunds on February 15 and the need for ITINs. Those are the two big changes in the filing season that we're concerned about creating, rolling into the early and mid-part of February and generating a lot of sudden awareness by taxpayers that call us that will make taxpayer service not as good as it should be.