On May 28, the Commissioner of the Small Business/Self-Employed (“SB/SE”) Division, the National Taxpayer Advocate (“NTA”) and the Chief of IRS Criminal Investigation (“CI”) provided their insider perspectives on the current state of the IRS at a town hall held at the New York City Bar Association. Each of these executives gave insights into the challenges facing the Service.

One major takeaway from the session is that after decades of budget cuts, the IRS is hiring again and the White House’s most recent budget provides for $15 billion in incremental funding over the next ten years. Mary Beth Murphy of SB/SE noted that the agency currently has 18,200 civil agents, down from over 20,000 in 1998. Revenue agents are especially vital to civil tax enforcement and the shrinking work force has reduced the number of individual returns examined from 1,192,780 in the fiscal year ending September 30, 1998 to 892,187 in the fiscal year ending September 30, 2018. Put another way, only .6% of the over 150 million returns filed by individuals in 2018 were subject to audit compared with almost 1% of the 123 million individual returns filed twenty years ago. Murphy noted that the agency’s efforts to grow have been complicated by competition in the employment marketplace and that the training process requires taking current agents “offline” to assist their new colleagues. However, one can expect the current push to increase the number of revenue agents will result in more examinations.

Murphy also addressed issues of transparency. While lawyers and accountants representing taxpayers in examinations frequently file Freedom of Information Act requests for revenue agents’ administrative files (and obtain those files with certain redactions), Murphy touted a recent memo encouraging agents to disclose certain information proactively without waiting for a formal request.

Nina Olson, the National Taxpayer Advocate, spoke about the challenges her office faces in helping taxpayers resolve issues with the IRS. While the Taxpayer Advocate’s staff is down to 1,650 (25% off of its peak of 2,200), it has opened more physical offices in an effort to be more accessible to taxpayers. Olson told the audience that her office is developing tools to help taxpayers and their representatives better understand the IRS’s internal processes and the many forms and notices issued by the agency. She stressed that her office is available to help all taxpayers, not just those who lack the resources to hire professionals.

Olson, who is retiring after eighteen years as the NTA, touted her annual report to Congress identifying the twenty most significant issues facing taxpayers. The 2017 and 2018 reports are a must read for those concerned with the challenges facing the IRS and taxpayers, and the upcoming report similarly promises to address important issues in tax enforcement. Among Olson’s current concerns is the use of data analytics to identify and assist taxpayers who are delinquent in their obligations, but truly lack the resources and income needed to make their installment payments.

Don Fort, the Chief of IRS Criminal Investigation, discussed his division’s mission as it enters its 100th year. Fort noted that there are currently 2,100 Special Agents, who are responsible for conducting criminal investigations throughout all 50 states. This represents the same staffing level as existed 50 years ago and is down from approximately 2,800 special agents 20 years ago when the IRS processed approximately 25 million fewer individual returns. While CI recently hired 250 additional agents, it has not kept up with the loss of 1,000 agents who took voluntary retirement. In addition, once special agents are hired, their start dates are often delayed by the absence of slots at the Federal Law Enforcement Training Center, where all federal law enforcement agents are trained.

Fort discussed the importance of deterrence, which he described as the backbone of our “voluntary compliance” tax system. In terms of enforcement priorities, given CI’s status as the preeminent financial crimes investigative agency in the country, it necessarily devotes resources to non-tax matters such as fraud cases (including the FIFA investigation and the ongoing Varsity Blues case) as well as money laundering, identity theft, cryptocurrency and cyber-crimes and public corruption. Nonetheless, Fort noted that his agents were devoting more time to core tax cases (i.e., the failure to report lawful source income), especially employment tax cases which remain a priority for the agency.

Fort also noted CI’s work on international tax enforcement matters and its cooperation with foreign governments investigating tax evasion both in the U.S. and abroad. In this regard, Olson expressed concern that information exchange agreements with other countries need to address the privacy concerns of U.S. taxpayers and suggested that such agreements should be subject to notice and comment and that affected taxpayers should be notified when their information is being turned over to countries that do not provide the same level of privacy protection as is mandated under U.S. law.

Surprisingly, Fort noted that only 7-8% of CI’s current investigations arise out of civil audits, a number that appears to be depressed by virtue of the current lack of revenue agents conducting investigations, and he added that relatively few criminal investigations arise out of whistleblower claims. He explained that, in order to maximize deterrence, CI seeks to spread its resources (and the resulting criminal prosecutions) around the country, which means that conduct that might be deemed relatively minor in New York might be viewed as sufficiently serious to warrant prosecution in other jurisdictions. This gives rise to questions regarding the fairness of having the tax enforcement system predicated on obtaining high sentences for relatively few criminal defendants chosen at least in part on the location of their violations as opposed to the nature of their conduct.

Finally, Fort and Murphy both addressed the IRS’s new voluntary disclosure practice, which was implemented after the last of a series of Offshore Voluntary Disclosure Programs concluded in September 2018. Fort noted that the pre-clearance process is now running 30 to 60 days and that approximately 75% of the disclosures submitted under the new practice have addressed domestic tax compliance, as opposed to offshore violations, which were the predominant issues presented in recent years. Once CI approves a voluntary disclosure, the taxpayer files amended returns, which are examined by revenue agents. Murphy noted that, at the conclusion of the exams, taxpayers can request closing agreements. Given the rise in enforcement activity that will almost certainly follow the increased staffing, delinquent taxpayers should consider taking advantage of this opportunity to cure their heretofore undetected violations.