This is a most turbulent time for the IRS. The agency is plagued with enormous document-processing and telephone backlogs, mostly attributable to Covid-19 shutdown orders that all but stopped government operations in the summer of 2020. The agency must also deal with the fact that about 30 percent of its workforce is eligible to retire by the end of 2023. If that plays out, the IRS could lose close to 25,000 employees in the next 13 months. Meanwhile, the agency has come under criticism for not focusing its audits on high-income earners who, critics assert, are responsible for most of the tax-cheating.

In addition to all this, the infusion of $80 billion of new revenue (over and above its usual annual appropriation) over the next ten years will put the agency’s combined appropriation for next year at right about $22.5 billion, nearly double its current allowance. This raises the questions of how these funds should be allocated and who should guide the process.

How to Spend the Money

I adamantly opposed the idea of pumping an additional $8 billion into the IRS’s annual budget every year for the next ten years, but that ship has sailed. The question now is how to get the most bang for our buck. In my opinion, the answer is taxpayer assistance and education.

The friction between enforcement and education has revealed itself mightily in the past 40 years or so. The tax code in the 1950s and 1960s was not particularly complicated, and while there were periods of very high tax rates, the breadth and scope of the code was such that most people could fairly easily determine and discharge their legal duties without professional help. That has not been the case since the 1980s.

In 1992, IRS commissioner Shirley Peterson pointed out that much of what we call noncompliance with the tax code is not noncompliance at all. Rather, she noted, it’s a lack of understanding of what the law requires. This was a clear signal that the IRS needed to spend more money on taxpayer assistance and education.

It didn’t take long for that attitude to change. Margaret Richardson was named commissioner by President Clinton during his first term. She once observed that when it came to making a choice between enforcement and education, enforcement would win every time. She brought back the heavy hand of the IRS, which eventually led to the Senate Finance Committee’s hearings into IRS abuse in 1997, followed by the IRS Restructuring and Reform Act of 1998.

Doug Shulman assumed the role of commissioner in March 2008. He quickly announced that the question of enforcement vs. education is a false dichotomy and that the IRS has to do both: Enforce the tax laws fully and fairly, while at the same time educating citizens about their responsibilities so that they are better able to comply in the first place.

Former national taxpayer advocate Nina Olson has repeatedly pointed out that 98 percent of all federal revenue is paid to the government “voluntarily,” that is, without the need for IRS intervention. I have often said that people screw themselves into the ground to comply with the code, but the complexities often trip them up.

The code now consists of more than 4 million words, and it has been changed more than 6,000 times since 2001. Nearly 80 percent of all taxpayers now use tax professionals or commercial tax-preparation software to comply with their filing obligations. As former commissioner Shulman once said, the code has gone from complexity to perplexity, and the chief victim of this morass of nonsense is the American taxpayer.

Barring a significant congressional attempt to simplify the tax code in any meaningful way, taxpayer education and assistance remains the most effective means of combating noncompliance.

Who Will Guide the IRS?

President Biden nominated Danny Werfel to fill the role of IRS commissioner, vacated when Chuck Rettig’s term ended in November. Werfel has both private- and public-sector experience. He was acting commissioner of the IRS during 2013, just prior to the appointment of John Koskinen as commissioner. Werfel served while the IRS was under attack for subjecting to higher scrutiny and improper delays the applications for exempt status filed by various conservative groups. Werfel also worked at the Office of Management and Budget for several years.

Werfel’s experience in the private sector includes his most recent work with Boston Consulting Group, a management-consulting firm. This experience may give him an edge when it comes to allocating the $80 billion windfall the IRS will receive. One of BCG’s core consulting services is to help large companies decide how to move cash within their business units, with the goal of allocating resources in the best possible manner to maximize growth and profit potential.

My Challenges to the New Commissioner

In light of the above, and assuming his nomination is confirmed by the Senate, I challenge commissioner Werfel to do two things.

First, he must rebuild — and increase — the IRS’s pre-filing education, assistance, and outreach functions to citizens and private-sector tax professionals. That should include working with the departments of education in the states to develop and incorporate a tax-education program into high-school curricula. Today, our students graduate high school without completing a single program that teaches them about taxes generally, or tax-law compliance in particular. High-school graduates don’t know the difference between a K-1 and a hole in one. The graduates of the best business schools in the nation do not get any basic training on tax-law compliance. Even in our law schools, federal tax is an elective course. Despite all this, the Internal Revenue Code touches every American.

Second, Werfel must pressure Congress to engage in honest discussions on real tax-law simplification. For starters, the new commissioner must insist that the IRS immediately begin complying with §4022(a)of the IRS Restructuring and Reform Act of 1998. This provision requires the IRS to submit an annual report to Congress identifying the chief sources of tax-law complexity and frustration for citizens regarding compliance. The report is meant to provide recommendations to repeal or modify whatever laws add undue and unnecessary complexity to the code. The idea is that the commissioner — who most certainly has unique insight into the problem — is to be on the front line of the tax-simplification battle. However, while the law requires the IRS to issue the complexity report annually, the agency has submitted just two such reports since the law was enacted in 1998, and no such report has been issued since 2002.

American citizens do not interact with the IRS voluntarily as they don’t have the choice whether to pay taxes: Their participation is forced as a matter of law. Thus, the ongoing task before the IRS — and its new leader — is to ensure citizens’ compliance with the least amount of heavy-handed enforcement, especially given that the tax code is wildly complex and changing regularly. Hardly any former commissioner has addressed the issue of complexity, despite having had an affirmative duty to do so, or recognized that the best way to secure compliance is through education. Commissioner Werfel should attempt to change both trends.

(For more from the author of “The IRS Gets a Massive Allowance and a New Commissioner. What Happens Next?” please click HERE)

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In a letter to members of the United States Senate, Internal Revenue Service Commissioner Charles Rettig did his part to carry water for the Biden administration’s push for $80 billion in new funding to his agency. Rettig argued that the IRS does not have “the resources that it needs to ensure the tax laws are enforced fairly and that Americans receive the level and quality of service they deserve.” On the heels of this plea, the Senate passed the Inflation Reduction Act, which the president signed on August 16, 2022.

In a letter to members of the United States Senate, Internal Revenue Service Commissioner Charles Rettig did his part to carry water for the Biden administration’s push for $80 billion in new funding to his agency. Rettig argued that the IRS does not have “the resources that it needs to ensure the tax laws are enforced fairly and that Americans receive the level and quality of service they deserve.” On the heels of this plea, the Senate passed the Inflation Reduction Act, which the president signed on August 16, 2022.

For example, the commissioner accuses “large corporate and high-net-worth taxpayers” of engaging “teams of sophisticated representatives who pursue unsettled or sometimes questionable interpretations of tax law.” The commissioner insinuates that corporations and the rich simply cheat on their taxes. He says, “This creates a direct revenue loss from evaders and lessens the potential to deter others from pursing a similar path of noncompliance.” Hence the commissioner’s argument, that a “strong, visible, robust enforcement presence,” is necessary to ensure compliance.

This argument ignores the fact that both the American Bar Association (ABA) and the American Institute of Certified Public Accountants (AICPA) each adopted — decades ago — ethical standards of practice pointed directly at legal and accounting professionals in the tax-planning and return-preparation businesses. The ABA standard, expressed in Formal Opinion 85-352, requires that a position taken on a tax return at the advice of an attorney must be “warranted in existing law or can be supported by a good faith argument for an extension, modification or reversal of existing law and there is some realistic possibility of success if the matter is litigated.” To be sure, tax pros have an affirmative duty to represent the best interests of their clients. But they also have a duty to follow the law in the process. Failure to do so places that professional’s license and livelihood at risk.

The commissioner’s statements suggest that the IRS is the final arbiter on all matters regarding tax law. But that’s not the case. The U.S. courts ultimately decide whether the law has been properly applied, and that is often at odds with the IRS’s opinion. As I document here, the IRS is wrong between 60 and 90 percent of the time (depending on the issue) when it comes to its audit results.

The problem is that most people do not challenge IRS audits because of the perception that the IRS must be correct, or that one just can’t fight back. The facts prove otherwise. In 2021, the IRS and U.S. taxpayers settled 19,963 cases docketed in the U.S. Tax Court. A total of $4.29 billion in taxes and penalties was at stake in those cases, and they were settled for $1.30 billion. This means that taxpayers owed just 30 cents on the dollar compared with the IRS’s allegations. Even that number is deceptive because in tax litigation, citizens reach a point where they must make a business decision the IRS never has to make. The agency might litigate over $50, but citizens have to balance the time, cost, hassle, and energy of fighting against the cost of a settlement. Citizens routinely settle tax cases for an amount they can live with, but which does not necessarily represent the true amount owed. The IRS knows this, so the agency pushes the envelope.

This is made clear in the disclaimer statement presented in its tax-guidance publications. The IRS produces and distributes through its website hundreds of official publications intended to explain the law in simple and non-technical terms. Publication 17, for example, Your Federal Income Tax (2021), is a 140-page guide to tax-law compliance for individuals. The small-print disclaimer reads:

The explanations and examples in this publication reflect the interpretation by the Internal Revenue Service (IRS) of: Tax laws enacted by Congress, Treasury regulations, and Court decisions.

Now, what happens when certain court decisions are at odds with the IRS’s “interpretation”? According to the disclaimer:

This publication covers some subjects on which a court may have made a decision more favorable to taxpayers than the interpretation by the IRS. Until these differing interpretations are resolved by higher court decisions or in some other way, this publication will continue to present the interpretations by the IRS.

It is clear that the agency does not apply “unsettled or questionable interpretations” in a manner most favorable to taxpayers. It sticks with its own interpretation. Yet when taxpayers or their counsel apply “unsettled or questionable interpretations” in their own favor, even when done in good faith, they are said to be tax “evaders.”

Nothing could be further from the truth. There is a remarkable distinction between tax avoidance and tax evasion — the willful and deliberate attempt to defeat the payment of taxes that one lawfully owes — that has been recognized by the courts for generations. Tax avoidance — claiming an itemized deduction for mortgage interest, for example, deducting charitable contributions, or otherwise taking advantage of existing tax-code provisions — is a perfectly legal way to reduce one’s taxes. As the Second Circuit Court of Appeals said in 1934,

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.

A person who in good faith takes a position that has some reasonable basis in the law is not “evading” tax. The commissioner and the Biden administration know that perfectly well, but it can be politically useful to elide the difference. And that’s easier to do when, as is the case under our current tax law, almost everybody can be made out to be a criminal.

The solution to this problem is not more money to the IRS so it can conduct more audits, the results of which are likely to be mostly erroneous. The solution is to abolish the Byzantine tax code and the army of IRS officers charged with enforcing it. We have to stop tinkering around the edges with tax “reform.” We must bulldoze the income-tax system and start over with a broad-based consumption tax. (For more from the author of “The IRS Commissioner’s Warning of Audits to Come” please click HERE)

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