Blake interviews Ed Karl, CPA & Vice President of Taxation at the Association of International Certified Public Accountants about Internal Revenue Service funding levels and the impact on both IRS service levels and the Tax Gap (the difference between what taxpayers should pay and what they actually pay on time). For years, service levels have been declining while the Tax Gap has been increasing, mostly due to unreported business income. A 2019 analysis by the IRS estimated that Americans report less than half of all income not subject to some form of third-party verification (such as a W-2). This year, unpaid federal income taxes could amount to more than $600 billion, and over the next decade, it could be as high as $7.5 trillion. Could increasing funding for the IRS help to solve both these issues? We discuss this and more in this in-depth interview.
How to Collect $1.4 Trillion in Unpaid Taxes
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Blake Oliver: Welcome to The Cloud Accounting Podcast. I'm Blake Oliver. There's no way to say it other than the last 12 months have been a bit of a dumpster fire. It's been a challenge for everyone during this pandemic, but in particular, tax preparers have had to deal with changing deadlines, changing guidance, unclear guidance, changing laws. All of that, of course, coming out of all the changes with the tax cuts, and JOBS Act in the years leading up to this pandemic.
It's been a challenging time to be a tax preparer, and that's why I'm very pleased to be joined today by Ed Karl, CPA and Vice President of Taxation at the AICPA to dig into some of these challenges that we're having as a profession, talk about the issues at the IRS, and think long term about how we can fix this because it seems to be a problem that's been going on since, I don't know — 2010, we started to have issues. I've seen posts that you have written in 2014–2015 talking about issues at the IRS. Thank you for joining me and welcome to the show.
Ed Karl: Thank you very much. I appreciate you having me.
Blake Oliver: How would you describe the last — how would you describe the pandemic for the tax profession?
Ed Karl: Unbelievable challenges for the accounting profession. I've never in my lifetime seen the far-reaching personal ramifications that we all have addressed. Not only the challenges — just as an example, IRS had to shut down last year because of health concerns, social-distancing concerns. All of their physical locations were shut down. Yet because of security, and confidentiality reasons, a lot of their employees were not set up to work remotely. Whereas it may have been an easier transition for CPAs. For me, I haven’t been in the office since March 11, 2020; not once. I haven’t been in the office, but we’ve had a seamless transition for AICPA and an ability to function.
IRS didn’t have the same capacity because of security of data, confidentiality concerns. There are criminal sanctions for disclosing confidential taxpayer information, so they have broad concerns and have always taken it very seriously, so for them to transition where they possibly could to a remote processing, remote functioning was a lot more difficult. Then, a lot of their functions were not capable of transitioning to that. We're all familiar with the backlog of the mail, where it got up to something like 20 million pieces of mail at one point, or in excess of that. You can't do that at home. You can't process the mail at home. It's just incredible.
Not only have CPAs had to deal with the professional ramifications — this what I was getting to about the personal ramifications of having to work at home — making sure you have the capability of doing that, but then having kids at home. Plenty of people told me, “When I'm taking a conference call in the one extra office we have at home, my spouse is taking a call at the same time in the bathroom with kids running around the house.” It’s just really been an unprecedented time.
Blake Oliver: You mentioned the IRS mail backlog, and there has been some dispute about this, it seems. Commissioner Rettig has said that the mail has been opened, and they are caught up on the mail. Maybe that only means that they have opened the mail, not necessarily that they have processed all of the returns, or forms. I see CPAs talking about how their stuff from 2019 hasn't been processed yet, and that is spilling over into 2020, and causing issues with penalties that have already been paid, but for some reason, the IRS hasn't cashed the check. Where are we with this, and when are we going to get caught up?
Ed Karl: I think that's one of the reasons that they were a little bit adverse to changing the due dates this year because they had such a challenge handling the changes last year, and a lot of the ramifications that it caused for them. They weren't able to change their notice cycles. It's something we're still talking to them about with the notice cycles. We've asked them to consider putting a hold on that notice cycle for at least 90 days until after they catch up with everything, so that's a good question.
The commissioner did say at the end of last year that they've caught up with the mail, so I will say this, number one — being caught up with the mail doesn't mean that they don't have a backlog. That's number one. I think they have normal amounts of work that they do. They had boosted up to unprecedented levels, and I think they've gotten down to what might be a normal backlog for them. They're not going to have a day where they don't have unopened mail. The question is how much do they have, and when do they expect to get through it?
I think you alluded to the other piece of it — what they've done with that unopened mail. There's a lot of processing that goes into the cycles that they have beyond just opening the mail. I've been in many service centers. I've seen them open the mail. Opening the mail means that they run on an envelope through basically a sander. They sand off the bottom of an envelope because they don't want to cut it for fear of cutting what's in the envelope. They basically have a fine sander, where they take off the bottom edge. Then, it goes through a whole process of triaging what's in the envelope. They try to do some of it through post office boxes, but not all of that —
Blake Oliver: I just want to make sure I'm clear on this. Opening the mail, according to the IRS, literally is just cutting a slit in the envelope.
Ed Karl: I don't know the full picture of what the commissioner was alluding to.
Blake Oliver: But we can assume that it hasn't gone all the way through processing, or we wouldn’t be having these issues —
Ed Karl: I think that's fair to say because I'm hearing from too many CPAs saying, “My client made a payment — filed a return, made a payment last year, and we're still getting notices about it, and I don't understand why.” I think what you're saying seems to add up that they may have opened a certain level of mail, but they haven't continued, or finished processing, and updating the master files for all that data.
I've even heard of a number of people now who’ve e-filed returns. The e-filed returns don't go directly into the master file either for security reasons. You don't want to give a third party access to the master file, so the e-filing of returns goes into a separate database, and then that later gets merged into the master file for security purposes. I don't even know if all of that has been updated because I'm still hearing from CPAs who said they e-filed 2019 returns and are still getting notices that would indicate to them that the master file hasn't been updated.
Blake Oliver: We’ve also got the issue of the phones. In that blog post I alluded to that you wrote back in 2015, I think it was, you had a chart in there that showed that the IRS used to answer something like 80 percent of the phone calls it received, and it had gone down to 40 percent. I believe, now, we're at an even lower percentage. Is that right?
Ed Karl: I couldn't quote you a current percent. I frankly thought that percent would have gone up at this point, but I honestly haven't looked at the numbers. There was an unprecedented situation back — the one you’re referring to — where there were some significant cuts in IRS resources, and their service levels had really plummeted. I believe that the service levels since — I’ll guess at the time frame — around ’17, ’18, ’19, it started increasing.
Frankly, we had started following service levels by doing an annual survey of our members’ attitudes about IRS service levels. We do that right after filing season. This year, we're going to do this survey right after May 17 to understand — we do ask service levels. The last three, or four years, the numbers were upticking, the service levels were upticking, until last year, which not surprisingly, there was a problem again last year with those service levels, but before the 2020 pandemic year, they started increasing and improving from the years that you're referring to.
Blake Oliver: They’ve started increasing — how do you measure that? What are they at right now? What is the AICPA member rating of IRS service levels?
Ed Karl: I’m just talking relative improvement, and our members’ rating of service levels, so I don't have authoritative data on what the levels of service are. What I was trying to indicate was that our members, in the survey, and the statistically valid opinions of AICPA membership were indicating an improvement, not necessarily appropriateness, or appropriate levels, but improvement
Blake Oliver: Improvement from terrible, or to good? What is the objective scale of this? If we're just talking atrociously bad to somewhat less atrociously bad, that's not exactly a great thing.
Ed Karl: Right. I wish I had that survey in front of me right now because I would pull it out and maybe we can do a follow up to talk about the survey data. You're asking a fair question —
Blake Oliver: Maybe you could just tell me anecdotally. I understand — I don't expect you have the numbers right in front of you, but I'm just curious — what do you think? Is the IRS service level —
Ed Karl: No. Clearly, the service levels are not acceptable where they are. I would say our members would back that up, in general, that the service levels are not acceptable. We took on a significant initiative because of the precipitous drops that we were seeing around 2015, and ’16. We've always gotten some level of complaint. The IRS deals in millions, and millions of taxpayer contacts, practitioner contacts every year, and many of them were going well, but a lot of them were not.
There were always complaints, particularly about notice cycles. That's always been an issue, even back then, and it's not fixed now. Notice cycles meaning my client got a notice. It's not correct. The CPA wrote a letter explaining why it was incorrect, and before the IRS opened it, and processed the response, they issued another notice to the taxpayer. That's always been somewhat of an issue, and that's gotten worse.
Blake Oliver: It’s like making a payment on your credit card. The credit card company doesn't open the mail and receive your payment, and then they send you a late fee, right?
Ed Karl: Exactly.
Blake Oliver: And they say you haven't paid your bill. It just seems completely ridiculous that this would be the situation. I guess it wouldn't be ridiculous if this was only caused by the pandemic. We could understand that the IRS is still paper-based and that not being able to be in the office caused serious issues in that regard. Although, we could say, “Why weren't you paperless already when so many other tax authorities around the world have done so?” Setting that aside, this wasn't an issue that started in 2020. This was an issue that's been going on since the early 2000s.
Ed Karl: 100-percent correct. You’re 100-percent correct. In some sense, the pandemic has shone a light on it, or — and made things even worse, right now, but we've been of the opinion for several years and have spoken about this in the past that there has to be some kind of alignment between Congress, and the Administration about the Internal Revenue Service, and that means a broad view. Some people speak about service. Some people speak about the audit process, and the audit rates, and the compliance process.
I would say the third leg of that stool has to do with technology. We think that there has to be an alignment between Congress and the Administration about what would be appropriate levels of service and compliance for the Internal Revenue Service, and then fund those levels.
You were asking me the exact right question — if your members are saying, over the last several years, that there was a positive uptick in the service levels, does that mean it went from horrendous to bad? We’ve seen additional funding go to the service, the last year, or two, but the question is what level of answering the phones does Congress believe is appropriate?
Blake Oliver: It’s not just answering the phones though, right? It’s also this —
Ed Karl: You're right. I’m just using that as an example —
Blake Oliver: I apologize. I didn’t mean to cut you off there, but the reason I want to interject is that there have been a number of stories recently in the press about how audits of millionaires, and billionaires have declined precipitously. Very few corporations are being audited, or pass-through entities, I should say, are being audited in the single digits, or less than that.
In particular, The New York Times analyzed an IRS report that found what they claim is a $1.4 trillion tax gap that because the IRS does not have the means to audit, and its mostly corporations, and that we don't have a way of getting information about the revenue of corporations, other than through a voluntary self-reporting regime, in many cases, that unpaid federal income taxes may amount to more than $600 billion this year, and more than $7.5 trillion dollars over the next decade.
The question I have is — is the IRS underfunded, and is it not just a little bit underfunded, but dramatically underfunded? I was curious about the AICPA’s stance on this. In preparation for this interview, I found a page on the website IRS Taxpayer Services, where it discusses the AICPA meeting with congressional offices, and the IRS to increase funding $290 million for taxpayer services. I'm not sure how recent that is because there's not a date here.
I wanted to put that money in context because it seems like a lot of money, but the IRS budget is something like, what, $12 billion, so $290 million for taxpayer services, that’s 2.5 percent of the current budget. Then, I was shocked to learn that since 2010, the IRS budget has actually declined in today's dollars. It has gone from over $14.5 billion down to less than $12 billion in 2019. The number of full time-equivalents of IRS personnel has declined. It went from close to 85,000 down to less than 75,000.
How much of this problem is caused by the pandemic or, like you said, is exposed by it, but how much of it is just that we haven't funded the IRS. Then my question is wouldn't we, as a profession, be interested, and give more than a 2.5-percent bump for resources for them?
Ed Karl: That comment by us, and it is quite a few years old, but it was the first instance in a number of years — you explained it correctly that there had been a drop in the IRS budget for a number of years. They had gone down from their high watermark. That was the first time Congress had started to increase, so we were recognizing that trend. We were in no way saying what an appropriate level was.
That's what I was saying a few minutes ago is that there has to be some kind of alignment between Congress, and the Administration about what service, compliance, technology needs are, and then fund those levels. For example, if you talk about the audit rate of high-net-worth individuals, and it's dropped — it dropped from, I don't know what percent it was, but let's just say it was a couple of percent. It wasn't 100 percent, and no one is saying it should be 100 percent.
What should that percentage be, and what's left on the table, and is that number accurately determined? What should that number be? There has to be an alignment between Congress, and the Administration about all of that, and then fund the organization, fund the agency to meet what you believe are the appropriate levels. If you believe below one percent audit rate for individuals is incorrect, what rate do you want? What rate do you want?
Blake Oliver: I'm not so much concerned about the rate of audits, although it is a bit embarrassing that it's much easier to be audited, as a low-income individual, than as a high-income individual. That seems backwards to me, but I'm not so much worried about the actual rate. I'm worried about the fact that there is very clear evidence that because we don't have enough IRS personnel that there's a tax gap, and that, like I said, we're losing something like $600 billion a year. That's a lot of money. Over 10 years, that could pay for three infrastructure packages.
Bringing this back to the current situation in Washington, we have the Biden administration that wants to pass a $2 trillion infrastructure bill. The way they want to pay for it is by increasing corporate taxes, taxes on domestic income, and also capturing foreign corporate income — profits that have been exported overseas — by instituting a minimum global corporate tax regime.
This would increase the burden on corporations significantly. They are often our clients. We probably do not want this on their behalf. They do not want it, but nobody's talking about how just by collecting the money that we are already due, we could pay for this entire infrastructure bill. $600 billion a year over a few years equals $2 trillion.
Ed Karl: Right. That's an estimate, and again, when you say, “when it's due,” I don't know — I don't think that's assessed tax that the IRS has not collected. When you talk about the tax gap, it's the perception of how much — the correct amount of assessed tax versus what was voluntarily reported. Then, the question is — is that an accurate number? Again, I'll say this, if you audited [crosstalk 23:52]
Blake Oliver: Just on that point, this is from an IRS report in 2019, as reported in The New York Times — I haven't dug into the report itself — I’ll read this. It says, “The IRS estimated that Americans report on their taxes less than half of all income that is not subject to some form of third-party verification, like a W-2.” We're talking about income — all income is taxed in this country, unless specifically excluded. We're saying that they are not reporting it. That's tax evasion.
Ed Karl: There was a problem. I'm not trying to argue that there isn't a problem. There is a problem. There is a problem in the voluntary compliance system. Reasonable increases in third-party reporting have always shown that there is an improvement in voluntary compliance when that happens. The question is, number one, what's a reasonable third-party reporting? If you take someone that pays their plumber in cash, you're not going to necessarily ask an individual to file a 1099 [crosstalk 25:18]
Blake Oliver: We're not going to get all of it obviously, yes, but we could recapture some of it, certainly, right?
Ed Karl: You could recapture some of it, and you could increase the audit rate. I've heard seven, eight times the amount of money you put into an audit, you'll recapture in additional taxes. There's a lot of money there, you're right. The question that I was raising is how much of that do you want to capture? You’re saying if you got all of it — what would you have to do to capture all of it? I don't think that [crosstalk 26:05]
Blake Oliver: We might have an answer here. Charles Rossotti, who led the IRS from 1997–2002, he says that by investing $100 billion in the IRS over the next decade, the agency could collect $1.4 trillion in lawful tax revenue that otherwise would go uncollected — $1.4 trillion. Remember, we're talking about a $2 trillion infrastructure package right now, so this seems to me like a way to basically pay for most of it.
Ed Karl: I'm not arguing against that. I'm actually agreeing. What I've been saying is that Congress, and the Administration should agree on what it is they want to capture — what level of compliance. You can do a study. I’m not an economist.
Blake Oliver: Wouldn’t we want to theoretically collect all the tax that is due?
Ed Karl: 100 percent. AICPA — in fact, it's something that I've been involved with for years are tax ethical standards. We believe CPAs are very ethical. We believe that there should be a high degree of ethics in the tax system for everybody, and that taxpayers should pay the correct amount of tax, but then you get questions as to what the correct amount of taxes are. There’s just [crosstalk 27:39]
Blake Oliver: This doesn’t even go into tax policy. We're not talking about increasing tax rates. We're just talking about collecting unpaid tax — tax that is already due —
Ed Karl: I’m agreeing with you. Right —
Blake Oliver: Is that the position of the AICPA? You say that Congress, and the administration need to agree, but isn't it up to us to tell them what to do, to guide them, to lobby them?
Ed Karl: Yes, and we’ve done that.
Blake Oliver: How much — it looks like to me — we're talking a $12 billion budget for the IRS, and we're talking about investing $100 billion to raise more than a trillion. That's a lot of money. Is that the actual position of the AICPA that we should dramatically increase the IRS budget? Do we have a number? Do we have a target?
Ed Karl: No, we don't have a target because we're not economists. We don't do studies like that. We deal mainly in tax administration. That's not our wheelhouse to determine what the correct level of the tax gap is. We haven't done that. We've talked about it in the past. We've talked about it from a tax policy perspective. We've talked about it from an ethics perspective. We've talked about it for years.
Blake Oliver: It would certainly help improve the service levels at the IRS and catch them up on their backlog and all of that. Don't we need to do something? We can't just complain about the IRS service levels if we don't have a solution — we could offer a solution. We could say, “Do this — invest $100 billion in the IRS.” It seems like a no-brainer to me. Why don’t we advocate that?
Ed Karl: We’ve been advocating for a long time. We've been advocating for resources, as have other organizations. We've been advocating for an alignment of Congress, and the Administration to decide what appropriate levels of funding would be. You could say, “Collect all the unreported income, and you have a lot of money to pay for other services.” That's fine —
Blake Oliver: We don't have to raise taxes, and that's in the interest of our clients.
Ed Karl: That’s fine if that's what Congress wants to do and agree with the IRS to do it. That's fine. We've said that, but what I'm saying is it's not just about the money. We've also advocated for changes in tax administration. We issued a report several years ago about a broader — it's not just about resources. It's about congressional oversight, or governance objectives, or the way they function with human resources. We’ve made numbers, measuring taxpayer satisfaction as a way to improve service levels.
We've talked about something called the practitioner services division, which would utilize represented taxpayers. Just as an example, all the taxpayers that CPAs represent, and have the IRS better function with represented taxpayers so that the IRS could better function with unrepresented taxpayers and leverage those people who are already getting some level of service. We've made broad numbers of recommendations over the years, including a change in the approach to resources.
It's not just about resources. In some sense, there is an easy answer — you're going to collect all this money — but you have to have the right compliance initiatives. You have to have the right approach. There are different ways to capture that money. You have to have different approaches to the compliance initiatives that work. You have to have appropriate appeals services because taxpayers should be afforded their rights.
You can put money into compliance, but it doesn't mean that all the compliance initiatives work appropriately. There are a lot of other initiatives that we've been involved with over the years to improve the tax administration system. Money is not the only thing. Money is an important consideration — I'm not saying you shouldn’t focus on that — but there are a lot of other issues to focus on.
Blake Oliver: Do you have a number that you would like to see the IRS budget be at?
Ed Karl: No. Again, we're not economists. We haven't done a study on what appropriate levels would be. Again, you mentioned, what, $14 billion? What if you doubled that? Is that the appropriate number? I couldn't answer that.
Blake Oliver: This former commissioner is saying not just double it; he’s saying add $100 billion to it, so eight, nine times? I'm seeing what is being proposed out there, in the press, and dramatic steps. I’m searching around trying to figure out what is the AICPA position on this, and I can't figure out what it is. It seems to be very vague.
Ed Karl: Again, we don't have a position on what an appropriate funding level is for the IRS. We don't say that it should be $10 billion, $12 billion, $100 billion. What we say is that there should be a balance — this is just about resources because we have positions on many other things regarding taxing administration, but with regard to resources, there are arguments about what that appropriate level is.
You're asking the same question now — what is the appropriate level? I don't know what the appropriate level is, but to be fair to the agency, and to be fair to the American public, that is a determination that Congress should make through its budgeting process in consultation with the IRS to determine what that appropriate level is. Now, again, if you say, “What's the appropriate funding level?” you have to back that. What does that mean about how many phone calls are answered and how quickly?
Blake Oliver: Right, service levels. Can we at least say what an appropriate service level is?
Ed Karl: I don't —
Blake Oliver: What should they be aiming for? We should be advocating for the IRS to do X to fix the problems for our practitioners, right? Should we say that we want every CPA, when they call on behalf of a client, to be able to get through to somebody at the IRS 90 percent of the time, or more, maybe?
Ed Karl: When you say to get through 90 percent of the time, what does that mean? [crosstalk 35:23] the phone is answered the first time it rings?
Blake Oliver: I think the problem right now is that something like 70 percent of phone calls are going unanswered, period. People give up because it takes so long. I hear about tax preparers who are on the phone for half a day to try and get somebody, and then they are disconnected.
If we're not going to give a number for the budget, or advocate in that regard, shouldn't we at least advocate for some sort of minimum standard of service? It seems like money would help. It seems crazy to me that we are saying, “IRS, you are doing a bad job at serving our members, but we're not going to advocate that Congress give you any more money.”
Ed Karl: Again, that's not what I'm saying. With regard to service levels on a phone call, for example, we have spoken up very vociferously for years that the ability to get through on the phone is not appropriate. The question is what is an appropriate level? They had something called “courtesy disconnects” — that's crazy — where CPAs would be on hold for two hours, and then the courtesy is to say, “We're hanging up on you,” and then, you get hung up on, rather than just being disconnected without knowing that you're being disconnected. That's a courtesy disconnect.
We think that's inappropriate, and we told them so. Waiting for two hours on the lines to get through, from a CPA's perspective, is a waste of time, and it's not appropriate. Now the question is what is appropriate? We've spoken to them about talking to a credit card, or banks, or other service-industry call centers, and what they're doing. What is inappropriate? You may call an airline and have to wait 20 minutes? Is that appropriate? Is that the appropriate level?
Blake Oliver: Shouldn’t we have an opinion on that? What do you think? I think if I call the IRS, as a practitioner, shouldn’t — I would love if they would pick up the phone within 20 minutes. I'd be happy, but I’d like sooner. That would be great, too.
Ed Karl: Right. So, what's the answer? Is it [crosstalk 38:02]?
Blake Oliver: Our members would tell us.
Ed Karl: Our members would love to — it rings once, and someone picks up, and they get an appropriate answer.
Blake Oliver: Maybe we ask for that, and then, if we don't get it, we get something less than that, but at least we asked.
Ed Karl: Yes, but that may not be even within service industry standards, so to recommend something — Again, I don't know. That's not my wheelhouse. We do deal with tax administration, but we don't deal with phone levels of service and what's appropriate. What is there today is not appropriate. What is an appropriate level — again, what we say —
Blake Oliver: Our position, the AICPA position, is that what is there is not appropriate. It needs to improve. How much, we don’t know. How much money they need, we don't know?
Ed Karl: What we've said is that Congress, and the IRS should develop what they both agree to are appropriate levels of service, and the Congress should fund to that, and there should be measurements of how IRS performs to those levels that are expected. That is the minimum of what we expect.
Blake Oliver: We’ve been saying that for years now, right?
Ed Karl: We've been saying that for several years, yes.
Blake Oliver: And they haven't done it.
Ed Karl: They haven't done it. We've also asked for them to increase — before that, we asked them to increase funding levels. They haven't done it; so have other organizations asked for funding. Government has limited resources, and they haven't done it. We've advocated different approaches.
We've advocated different types of improvements in tax administration, some of which they adopt. For example, this practitioner services division that I mentioned, there was an act, July of 2019, called the Taxpayer First Act. We recommended a practitioner services division, which would leverage limited resources to improve service, and it seems like they’re considering something like that. They put a report out at the end of last year, and it looks like maybe they're considering something like that.
We're following those types of things and trying to promote different ideas of improving tax administration, improving customer service, improving compliance levels, improving approaches to examinations, but again, I don't have the expertise to tell you what the audit rate should be. Should it be below one percent that it's at now? Should it be 1.5 percent? Should it be five percent? It'll never be 100 percent, so the question is where, between what it is today, and 100 percent, is the appropriate level? Part of it is the [crosstalk 41:19] factor —
Blake Oliver: How is Congress going to know that without somebody telling them? They're not accountants. We could guide them in that. We could tell them, “Here's what we think is appropriate for each ...” [crosstalk 41:30]
Ed Karl: What I’m saying is that isn’t our expertise. We do talk to them about a lot of things — tax administration issues — that are in our area of expertise. Levels of phone service are not in our expertise; speaking out where we hear complaints, and concerns, and passing those on, and recommending changes to try to improve, we do. We do that all the time. I can't say that the phone should be answered the first time it rings. I can't say that's what it should be. To be on hold for two, or three hours, and then hung up on? We can say that it's not, and it has to improve, and we've done that, but —
Blake Oliver: How do they improve it without the funding to do it? How do they — do you think they're underfunded?
Ed Karl: Again, it's not an issue of underfunding. It's a question of finally measuring, and you're saying the same thing. You’re saying improve their funding. You’re saying [crosstalk 42:52] should tell them what the appropriate levels are. I'm agreeing that someone should tell them, who has the technological, and other experience to tell them what those levels should be. I wish we did, but we don't have that expertise.
Blake Oliver: Can we go get it? I'm just trying to think, who else is better suited to do this? We're the ones who deal with the IRS all the time, more than anyone else. We have the closest relationship with them on behalf of all the taxpayers in this country. Why can't we have an opinion on it? Why aren't we experts on this? I know a lot of accountants who have opinions on this. I surveyed Twitter — most of my Twitter followers are accountants. I asked, “Do you think the IRS is underfunded?” 77 percent said very underfunded; 15 percent said somewhat underfunded.
Ed Karl: Right. Let's just say they're underfunded. What is the appropriate funding level?
Blake Oliver: If we can spend a dollar, and get $7–$10 revenue, it seems to me that the level of funding should basically be equivalent to whatever we can spend to get the revenue that's not being collected right now. The IRS is not collecting all of the legally due income tax in this country.
Ed Karl: That's money going into compliance. That's not money — they need money to devote into the technology infrastructure.
Blake Oliver: Right, all of it.
Ed Karl: They need money in service. That money may not directly bring in a multiplier of taxes. I would say, in some levels, by improving service, you improve taxpayers’ interest in wanting to voluntarily comply. Not everybody [crosstalk 44:56] but it’ll help.
Blake Oliver: I guess the reason I'm thinking of this right now is that there's this humongous infrastructure proposal. We're talking about spending trillions of dollars. There's a lot of money flying around right now. It seems like somebody could be standing out there talking to the press, and we could be saying, “Hey, everyone, look over here! We don't have to increase corporate tax rates in order to pay for this bill.” That's our expertise. We know corporate tax. That's our thing —
Ed Karl: Actually not. Let me clarify — we've never advocated on tax rates.
Blake Oliver: This is not a tax-rate thing, though. This is just collecting the rate that already is there. It's collecting all of that. There's a gap, and that's because the IRS is underfunded that they cannot collect all of this money. That, to me, seems like a pretty reasonable, logical chain.
If they had more money, if we funded the IRS dramatically more — and we're only talking $100 billion out of $2 trillion. It's a tiny little fraction — we could basically reduce the price of the stimulus bill. We could cover that cash with more revenue for the government that is already due.
I used to manage accounts receivable for businesses, and it would be like if I just was letting half of my accounts receivable go because I just I didn't have enough — I wasn't investing in enough AR clerks to collect it all, and I was just allowing customers not to pay their bills. It seems nuts.
Ed Karl: Yes, but evenbusinesses don't go after every dollar that it’s owed. At some point, they'll say there's a diminishing return, from a business decision perspective —
Blake Oliver: Right, but would any business allow half of their revenue to go?
Ed Karl: Probably not. I don't know that what's outstanding is half. I don't think it's close to half, but it's a significant amount. I'm not trying to argue that there's not a lot. I'm not saying there shouldn't be more done to improve that. Again, CPAs are not economists. Our wheelhouse is administrability. We focus heavily on helping IRS improve the administrability of the system. When I talked about tax rates, you don't need to increase the corporate rate, or the individual rate if you just collected everything that was legally owed, and that may be —
Blake Oliver: Not even everything. We’re like a third; a third of what's currently going missing. Half of all income that is not reported on a W-2 is not reported to the IRS. That is according to their own report. That's their estimate. Obviously, it's an estimate, but it's a lot of money. We can assume that even if the estimate is off by a significant amount, it's still a lot of money, and it's worth capturing. It would pay for a lot of these additional programs.
I'm not in support, or against the additional spending that is happening on Capitol Hill right now, but if we can reduce the pain to our clients, our corporate clients, who are going to be faced with higher tax bills with a solution, we could advocate for that. We should be shouting from the rooftops that here's a solution that will not increase corporate tax rates.
Ed Karl: Again, that's not where we advocate, right? You're talking about let's advocate for something that won't increase the corporate rate, or the rate on high-net-worth individuals. The question is what is the appropriate tax rate for corporations? It's a lot. It’s not just a [crosstalk 49:02]
Blake Oliver: We don't even have to ask that question. We don't even have to face that. That's a political question. I understand that we should not have an opinion on the specific rate, necessarily, but we can — nobody likes higher taxes. I don't think anybody wants to pay higher taxes for no reason.
If we can achieve the same objectives without raising taxes, isn't that something we could advocate for? The ancillary benefit is that we also could improve service levels at the same time because if the IRS suddenly had a lot more money, they could hire the people with the experience do all this stuff —
Ed Karl: Just remember that that money doesn't necessarily go to service. Again, how much of the money are they going to put in — you're talking if you gave them a lot more money, they would collect all the unreported income —
Blake Oliver: You give a dollar to the IRS; they bring in another seven or eight bucks. You said that. Maybe we give them a dollar for compliance, and then we all —
Ed Karl: A dollar for compliance, right, a dollar [crosstalk 50:18]
Blake Oliver: We could also say, if they're getting — this is the thing: if the IRS is bringing in more money, then there may be more interest in improving taxpayer services, and resources. There's a lot of ways that we can make things better. It seems like there’s a really high ROI. If I'm looking at this as a business decision, and I have a project, and I could invest a dollar, and make eight, I would absolutely do it.
Ed Karl: Again, we've advocated for improvements in resource levels for a number of years. We've shifted to talk about coming to an agreement because that wasn't being picked up on. We weren't the only organization to do that. We focused on having Congress talk to IRS about appropriate compliance, appropriate service, appropriate technology levels of funding to improve the agency to set measures, and performance goals so that there would be improvement. We've talked about the tax gap for a number of years. We've talked about ethical gaps for years. We've talked about transparency of reporting, and supported transparency of reporting.
We provide, every year, numerous tax-administration improvements. Again, the one thing that we don't focus on — we don't have that expertise to determine — maybe there are companies that do that type of analysis that could work with IRS to do that. That isn't something that we have the expertise to do to determine what that level is and collect an appropriate level of the tax gap. Again, whatever that tax gap is, collect it, but we've been advocating for these things for years, all of these things. It isn't just one thing. There's an allocation of those resources, as well. Again, putting a certain amount of money into compliance and collecting that, you would hope that some of those funds would find their way back to IRS to improve other areas. The money that they collect goes to the Treasury Department. It doesn't go to the agency for its use.
Blake Oliver: How do we change the situation? We've been advocating for these things without specifics because that's not our area of expertise, for years, and it hasn't gotten any better. How do we get out of this slump?
Ed Karl: We've been trying to promote the idea that this conversation has to happen like you’re talking about it.
Blake Oliver: We need more of this conversation in the public.
Ed Karl: I've been trying to do — we’ve been trying to generate more press interviews about the funding process. It's starting to pick up, and I've had more interviews over the last several months about these types of things and talking about the same thing about changes at the organization. I mentioned the Taxpayer First Act. IRS is saying that there are certain funding needs that they have to implement the Taxpayer First Act. We’re trying to promote the changes that would be brought about by the Taxpayer First Act, and the report that IRS issued.
We try to promote this when we have meetings in Capitol Hill. We talk about funding; we talk about services; we talk about compliance levels. We do it in press interviews. It's why I wanted to speak about it now, but again, we are lobbying on behalf of the CPA profession, and in areas of us expertise, which is tax administration, administrability of provisions, how to improve that, how to make that work better.
We try to shine light on when there are problems. Honestly, when you say, “What is an appropriate telephone service level?” I couldn't answer that. There are measures of that that I wouldn't even begin to understand. How many people do you need in one shift? How many taxpayers might call in one hour, or how many CPAs, or other practitioners might call in one hour and have different needs of service than — a taxpayer, and a CPA don't need the same people to speak to [crosstalk 55:48]
Blake Oliver: I'll help you out. I have an idea. I will survey my listeners and ask them what they think an appropriate service level is for phone calls. What else should we do? How quickly the IRS should open the mail? We could at least do the phone calls. Then, let’s see what people would be happy with.
Ed Karl: I don't know how to respond to that one. We do something similar. We ask our members about their attitudes about service levels, and that helps infuse our interactions with IRS, with the oversight subcommittees, and passing on concerns, and trying to shine the light on where there are problems and trying to get improvements. I think what you're talking about would do something similar, but it wouldn't measure what the appropriate level of service would be; it would tell you what users think the appropriate level should be, without understanding the cost to get there.
Blake Oliver: It would be the opinion of our members, right?
Ed Karl: Right, and I think that's important. I'm saying we do something similar. I would encourage you to do that, but then, you have to think through how you ask the question — what the responses would be; are there follow-ups to that? We do some similar things. They are data points that we use — important data points. Again, if there are trends up or down, those are important for us to know, and to pass on. The answers that you're going to get, again, ultimately, it's Congress that funds the Administration.
Today, there was a budget request out; there was information already starting to come out about what the Biden Administration is requesting, in terms of its budget. Those budget requests go to Congress. Congress has to appropriate that money, so it's Congress's constitutional responsibility to appropriate funds to run the Administration. It's the President — the executive branch's responsibility to allocate those or use those funds with all the different agencies.
Blake Oliver: It's our role to lobby them on behalf of our members.
Ed Karl: Correct, and we do.
Blake Oliver: I guess I would just say — this is my personal opinion — let’s give them harder numbers. I think congresspeople have trouble understanding anything that isn't black, or white. When we say vaguely increase funding levels — I would love to see something dramatic, I guess. I don't know, but I understand where you're coming from. It is not something that the AICPA has advocated for in the past, and it gets into that political thorny issue.
Ed Karl: It's not just a politically thorny issue. It's an issue of where we have expertise, and what — I hear what you're saying: to be more visible, to be more specific in what funding levels are. Ultimately, it becomes the responsibility of Congress, and the Administration to agree on what those funding levels will be. What we're saying is that it's not fair to hold an agency accountable without having levels agreed upon.
I don't think you'll ever see a Congress just give unlimited levels of funding to any agency, including the IRS. We've tried to say that there is a multiplier. We've said that, that that should be taken into account. The political reality is that seven, or eight times the money that comes in doesn't come in the same budget year. It doesn't come in even in the same congressional cycle.
Ultimately, when you say, “If you've been pushing for these different things, and they're not successful, then change them,” we have changed our approaches. We're trying to change them in a way that we think would be more realistic, but I think even us deciding on certain service levels — and I'll give you an example. We've done this in the past, where we've paid an economist to do a study on funding for a certain thing — certain types of legislation — and Congress chooses not to agree with it. We spent lots of money in the past trying.
That’s one of the reasons — again, it's not our area of expertise. It costs a lot of money to do, and then it's not listened to, or not agreed to. We've paid outside parties to do some economic studies, and then not a drop of it was listened to. They'll say, for example, “The assumptions made in the economic analysis, we don't agree to.” That's what happens.
You're pushing for laudable goals; you're pushing for more specifics; you're pushing for narrowing the tax gap, which would have a revenue multiplier effect, which could be used for other government services. If Congress decided not to raise taxes, that could be considered also. Again, that's a political-economic decision. These are all laudable goals, many of which are not within our wheelhouse; many of which — some of which we've tried in the past have also not been successful.
We've been focusing on areas of tax administrability, where we have had a lot of success, and a lot of changes, and a lot of improvement, which makes the system work better. That's the area that we've tended to focus on, where we’ve had a big uptick, and a big take up in the ideas. The ones that are more economically focused are expensive, and we've not had a Congress agree, or others agree to say, “Those analyses are what we want to believe.”
Blake Oliver: Ed, it's been a pleasure speaking with you. Thank you for all of your time today. I have been speaking with Ed Karl, CPA, Vice President of Taxation at the AICPA. Ed, if people want to learn more about what you do, in terms of tax advocacy, and the AICPA, where is the best place for them to go online?
Ed Karl: We do have a website — AICPA — If you google, or search for AICPA tax advocacy, you'll get to our home page. We have information about what we do. There's information — all of the comment letters, and position papers that we take are found there, as well, so it will give you a lot of information about our tax policy, and advocacy mission.
Blake Oliver: Thank you so much. Great talking with you.
Ed Karl: Thank you very much. I really appreciate it.