In a few days time – November 11th to be precise – my term as the 47th Commissioner of the Internal Revenue Service officially comes to a close.
I suppose it’s quite natural when one has completed a significant task like running the IRS for almost five years to pause ... to reflect on the journey taken … to mark the milestones met … and to ponder the lessons learned.
Standing before you today…standing on the shoulders of those who came before me…building on their work and achievements…it is gratifying to share with you the meaningful…and I believe, lasting progress that has been made to our nation’s tax system.
Today, I want to share with you some of the results of almost five years of relentless focus on a handful of strategic priorities we set for the IRS. The priorities are:
- Creating breakthrough strategies to combat international tax evasion;
- Transforming our relationship with corporate taxpayers;
- Transforming the IRS’ core technology;
- Rethinking and reimagining the IRS’ relationship with paid tax return preparers;
- Leveraging data analytics for continuous improvement;
- Driving efficiency and taxpayer service improvements; and
- Positioning the IRS workforce to make sure we are prepared for tomorrow’s challenges.
So, let me begin with our efforts on the international front. Both corporations and individuals operate in the global economy, as corporations seek out new markets and individuals have global exposure through their investments, including retirement accounts.
Yet, this fundamental shift to a more global economy has created a real set of compliance challenges for the IRS. On the individual front, we have made putting a big dent in offshore tax evasion a major priority.
We view offshore tax evasion as an issue of fundamental fairness. Wealthy people who unlawfully hide their money offshore aren’t paying the taxes they owe, while schoolteachers, firefighters and other ordinary citizens who play by the rules are forced to pick up the slack and foot the bill.
Over the past five years, we have significantly increased our resources and focus on offshore tax evasion, and the results have been substantial. We upped the ante in a meaningful way with our work on Swiss financial institutions – where for the first time in history, a bank secrecy jurisdiction turned over thousands of names and account numbers.
As we increased our enforcement efforts and gained significant momentum, we gave taxpayers a chance to come in voluntarily and avoid going to jail. In a typical year, we used to get 100 or so taxpayers who used our voluntary disclosure program. When we first set up our new program in 2009, we thought that figure would rise to maybe 1,000.
So we are very pleased that we’ve had approximately 38,000 voluntary disclosures from individuals who came in under the special programs.
To date, these individuals have paid back taxes and stiff penalties amounting to more than $5.5 billion, and the number continues to grow. We are mining the information we have received and have launched our next wave of investigations on banks, bankers, intermediaries and taxpayers.
We have fundamentally changed the risk calculus of taxpayers who are thinking about hiding their money overseas, and we are well on our way to deterring the next generation of taxpayers from using hidden bank accounts to cheat on their taxes.
Our tax system is set up in such a way that taxpayers fill out their own returns. This self-assessment system reflects the fact that it is the taxpayer, and not the IRS, who possesses all of the information relevant to tax liability.
We then use information reported by the taxpayer to make judgments about issues to pursue, and returns to audit. Inherent in this system is the basic assumption that the taxpayer will be forthcoming and the government does not need to be an “adversary” in most situations.
We now have a suite of different strategies, tools and programs we’ve been applying which include:
The CAP program, where we work with corporate taxpayers to resolve all issues before a tax return is filed, so that when the taxpayer files a return, there is certainty; fast track appeals process, where we move our administrative appeals process into an audit to try to resolve issues when they arise—rather than taking the issue through an appeals process after an audit is completed; our industry issue resolution program where we produce guidance to taxpayers, mostly in the form of safe harbors, so they need not worry about later controversy, and others.
We also asked taxpayers to be more transparent with us by disclosing their uncertain tax positions, which they book as reserves on their financial statements. The end game is a more productive relationship, which allows us to focus on corporate taxpayers and issues that pose the greatest compliance risk—and not spend time on taxpayers who pose a lesser risk of non-compliance.
Our strategic priorities also focused on critical foundational operations and infrastructure, without which the IRS could not fulfill its mission. And one of our most critical goals was modernizing our aging technology, and one critical program in particular…our core customer account database, also known as CADE2.
The payoffs from this change are quicker refunds for taxpayers, up-to-date information at the fingertips of our customer account representatives, and a platform for more real-time analytics and compliance. It is already benefiting taxpayers this year, and will produce major benefits for the nation’s tax system for years to come.
Our next key long-term priority is an initiative that we started over three years ago to look at how the IRS interacts with paid tax return preparers.Today, more than 9 out of 10 taxpayers use a paid tax preparer or tax software.
We shifted resources from dealing with taxpayers one-by-one, to dealing with the intermediaries who deal with hundreds or thousands of taxpayers at a time. That’s what I mean by leverage.
Given the importance of paid return preparers to the integrity of our tax system, we’re now well into the process of ensuring a basic competency level for tax return preparers and focusing our enforcement efforts on rooting out unscrupulous preparers.
Once the majority of preparers are registered and have taken the test, we will launch a public database so taxpayers can ensure that they are using a registered tax return preparer.
Our next major priority is leveraging data analytics in order to continually improve our operations. It can show us the areas of greatest non-compliance...and thereby, contribute to more efficient and effective compliance programs.
Using better data on return preparers that we gained through our return preparer initiatives and faster processing cycles achieved through our technology modernization, we ran a pilot applying advanced data analytics to link tax returns that showed potentially serious compliance issues to the individuals who prepared them. We identified a number of preparers with apparently inaccurate returns and, depending on the type and severity of the issue, are applying different types of compliance tools.
Based on risk scoring, preparers with problematic returns received one of three treatments: due diligence visits, outbound phone calls, or letters with monitoring. One goal of the pilot was to measure the effectiveness of early intervention.
We estimate that through the treatments in this relatively small pilot, we generated almost $200 million of savings on improperly claimed EITC and Child Tax Credit/Advanced Child Tax Credit claimed on these returns. In other words, relative to a control group where no filing season interventions were applied, the IRS found that the early intervention techniques reduced improper claims by about $200 million. And the cost of the treatment was only about $2.7 million.
So far this year, we have stopped approximately $19 billion in fraudulent payments from going out the door as compared to $12.5 billion over the same period last year. And these numbers dwarf the $2.4 billion that we stopped for all of 2009.
So as you can see, we are getting better at moving more quickly and using data to focus our compliance efforts.
For 2011, the American Customer Satisfaction Index survey of taxpayers showed satisfaction with the tax filing experience reaching 73 on a scale of 100 among all individual tax filers. That is our highest score since we began participating in the survey in 1994. I am especially proud of our continued progress in this metric, given the new responsibilities handed to the IRS in recent years…the increasing complexity of the tax code…and our continued drive to cut costs.
Starting with fiscal year 2009 and running through our budget of next year, we will achieve nearly $1 billion in budget savings and efficiencies.
So let me end by saying that it has been an honor to serve as IRS Commissioner during such exciting but challenging times.
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