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Dec. 2 — The future setup of the Internal Revenue Service is a bit up in the air after President-elect Donald Trump’s surprise win and Republicans’ continued hold on Congress.
Republican lawmakers have long railed against the agency, calling it inefficient and criticizing it for scrutiny of social welfare groups applying for tax exemptions. And as those lawmakers push for sweeping tax changes in the next Congress, retooling the IRS could also be on their agenda.
Though Trump himself hasn’t given many hints as to what he wants the agency to look like, practitioners specializing in tax administration pointed for clues to the GOP tax overhaul blueprint released in June, which has become a more prominent marker with Republicans in complete control. But if officials decide to move ahead on the ideas laid out in the vision, there are still some big questions.
The plan is likely “not in any way counter” to Trump’s ideas, said Jeffery S. Trinca, vice president at Van Scoyoc Associates in Washington. Still, it is member-driven and needs fleshing out, he said.
“Every generation comes along and rethinks what the IRS should look like, and it’s a little bit of moving the furniture around,” Trinca said.
The IRS, which currently has four divisions, will have three “units” under the GOP proposal: families and individuals, businesses and an independent small claims court.
A team of attorneys—possibly referring to the Office of Chief Counsel—will be on hand to provide guidance, though the blueprint says much of the current tax complexity will be eliminated. However, the proposal doesn’t mention the position of chief counsel, one of two presidential appointments within the agency.
The position of IRS commissioner will also get a revamp: an “administrator” will be appointed to a three-year term with the option to be reappointed once. The IRS commissioner currently serves one five-year term—that length of time is necessary to fully understand the agency, practitioners told Bloomberg BNA.
“It takes a while to turn a ship around—it’s like an aircraft carrier. You can’t turn around agency culture on a dime,” said Jason J. Fichtner, a senior research fellow at the Mercatus Center at George Mason University who studies federal tax and budget policy.
The changes may incorrectly lump small businesses together with large multinational corporations, entities that are split in the agency’s current setup. The unit structure may also lead to organizational silos. That was a consequence of the IRS’s 1998 restructuring, when its geographical branches were combined into the existing four divisions, practitioners said.
“If the Titanic is sinking, changing the names of the units doesn’t seem to do anything,” said Robert E. McKenzie, a partner at Arnstein & Lehr LLP in Chicago. McKenzie was a member of the IRS Advisory Council, which guides agency officials, from 2009 to 2011.
While the proposal misses some details, that’s partly the point, said Steven T. Miller, national director of tax at Alliantgroup LP and a former acting IRS commissioner. Areas that aren’t addressed in the proposal could still be raised down the line, he said.
“It’s very high-level and it doesn’t cover everything and I don’t think it was intended to cover everything,” Miller said, adding that Congress’ first goal next session will likely be tax changes in the areas they find most problematic instead of agency restructuring.
Members of Trump’s administration would also likely play a role in conversations. Neither Trump nor his Treasury secretary nominee Steven Mnuchin, a former Goldman Sachs & Co. banker, have publicly spoken about their vision for the IRS. Trump’s transition team didn’t return a request for comment.
The plan doesn’t mention the Tax-Exempt and Government Entities Division, an area of the IRS that has been riddled with controversy and attacked by Congress. Its omission mystified some practitioners and leaves open questions as to how Congress will handle the area.
One possibility would be for Congress to pass legislation specifically allowing tax code section 501(c)(4) organizations—which were at the heart of the targeting scandal—to engage in political activity, thus removing the thorny area from the IRS’s bailiwick, practitioners said. Or, lawmakers could go one step further and remove all regulatory functions from the agency, something that may have to be “part of any serious restructuring,” said Marcus S. Owens, a partner at Loeb & Loeb LLP. Owens is a former director of the exempt organizations division.
Trinca, who was chief of staff for the group that restructured the IRS previously, said the TE/GE area, along with IRS Criminal Investigation, was also mostly ignored by the restructuring commission.
“I think they’ve ignored it because they’re probably not going to do anything with it,” he said.
The GOP plan describes an agency that is solely focused on helping taxpayers, who will benefit from the simpler tax code it also lays out. The proposal makes no mention of the IRS’s enforcement powers.
While helping taxpayers understand their tax responsibilities is key to getting them to pay taxes, it would be shortsighted to completely defang the agency, practitioners said.
“Some people will just comply because that’s their nature, but other people will comply if there’s a stick at the other end,” said Mary Burke Baker, a government affairs adviser at K&L Gates LLP in Washington. Baker served for six years with the Senate Finance Committee and spent more than two decades at the IRS.
Still, the plan won’t be effective unless Congress adequately funds the agency, practitioners said. Congress has slashed the IRS’s budget by $900 million since 2010.
There have been some glimmers of hope: the fiscal year 2016 omnibus spending bill included $290 million specifically for taxpayer service and cybersecurity. IRS Commissioner John Koskinen has said he hopes Congress makes similar allocations in the future.
“If you’re not willing to fund it, taxpayer service is not going to be good under any commissioner or administrator,” Arnstein & Lehr’s McKenzie said. “If you’re not willing to fund enforcement, you can look forward to less and less compliance.”
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Text of the GOP tax overhaul blueprint is at https://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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