$80 Billion In New IRS Funding: What’s Next For The Tax Agency?

Robert Kerr of Kerr Consulting LLC discusses how the $80 billion of additional funding for the IRS in the Inflation Reduction Act could be best used by the agency.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: more money, more problems?

With the passage of the Inflation Reduction Act (P.L. 117-169), the IRS is about to see a significant increase in its budget. Despite some alarmist fears, the complete picture of how the money will be spent is not yet clear.

After years of declining funding, what can we expect from this new windfall? In a minute, we’ll hear more about that from Tax Notes senior reporter Jonathan Curry. Jonathan, welcome back to the podcast.

Jonathan Curry: Hi, Dave.

David D. Stewart: I understand you recently talked to somebody about the IRS budget. Who did you talk to?

Jonathan Curry: Our guest this week was Robert Kerr. He has his own tax consulting shop now, but he’s had a long career in tax that’s really covered a lot of bases.

He worked at the IRS for a decade in the ’90s, and then he went on to work on Capitol Hill as an aide to Sen. Chuck Grassley, R-Iowa. He also had a long stint working with the National Association of Enrolled Agents, advocating for the tax professional community.

He’s really well versed in just about everything tax. He knows tax policy, tax administration, tax practice, you name it.

David D. Stewart: All right. And what all did you talk about?

Jonathan Curry: Naturally we brought him on to talk about that $80 billion pot of funding the IRS was just granted last month as part of that Inflation Reduction Act.

We talked about how all this new money coincides with the changing of the guard at the top. IRS Commissioner Charles Rettig’s term is set to expire in November, and the IRS now has all this new money to spend.

We also talked about how long-term this funding really is guaranteed for. It’s supposed to be for 10 years, but will it actually last that long? And yes, you will find out once and for all if there is indeed an army of 87,000 gun-toting IRS agents coming after your grandmother.

David D. Stewart: Well, I can’t wait to hear, so let’s go to that interview.

Jonathan Curry: All right. Well, Bob, it’s great to have you here in the studio at 400 South Maple Avenue for this podcast. How are you doing today?

Robert Kerr: I’m great. I’m happy to be here. Thanks for the invite.

Jonathan Curry: We’re excited to have you here. We’re going to jump into it.

Last month President Biden signed into law the Inflation Reduction Act. There was a lot in there, but we’re going to spotlight just one wee-little provision in there: $80 billion in additional funding for the IRS that they get to spend over the next decade.

Tell me, Bob, does the IRS regularly get $80 billion infusions of cash from Congress or is this kind of a special event happening here?

Robert Kerr: Yes, this is a special. I love the frame there. It’s happened approximately never, as far as my memory goes. IRS has never been presented with a bump. Any increase to the agency’s budget is surprising, but something of this magnitude I’ve never seen. Not even close.

Jonathan Curry: First we need to get this out of the way. Will there, in fact, be an army of 87,000 armed IRS agents coming to pillage your grandmother’s village because of this bill?

Robert Kerr: Well, they’re not coming to my grandmother’s village. I don’t know about your grandmother’s village.

No, in fact, what’s absolutely remarkable is how much airplay this assertion has gotten. It is completely unmoored from reality, which doesn’t make it any less tenacious. You will see it everywhere. You’ll see it on Instagram, for Pete’s sake. The short answer is no, it’s not 87,000 “agents,” whatever an “agent” is.

Jonathan Curry: I know the IRS gets politicized and becomes a punching bag for both sides as it befits them. Have you ever seen anything like these kinds of claims coming out of the far corners of the internet — and really now in this case fairly mainstream sources as well — or is this a peculiar moment that we’re experiencing here?

Robert Kerr: I think it’s a question more of magnitude than it is of direction. I don’t think it’s at all uncommon to hear scurrilous things related to IRS. If you’re going to rank in order the favorite federal agencies, I don’t think it makes the top of anyone’s list outside of this room. There’s that baseline which I think is important to keep in mind.

But what we’re seeing recently — and Jonathan, it may be sort of part and parcel — is the overall deterioration of political discourse in this city, particularly, and written more largely in this country.

That said, to the extent that we’re seeing this type of persistent untruths, I think that that is new and unfortunate.

Jonathan Curry: This is long-term funding, and it comes out to about $8 billion a year. For an agency whose annual budget is really about $13 billion, that’s more than half of what they’re getting now.

This is a huge amount of cash. But is it really long-term funding in the way that it’s been signed into law?

Robert Kerr: On two fronts here. First, yes, it really is. It’s not only a supplement to the IRS’s base budget, it is a significant and massive supplement to the base.

To the larger question, which I think is one of many things that gets lost in the shuffle here. On paper, it’s theoretically 10 years’ worth of funding for $80 billion. That’s how the provision is written within the Inflation Reduction Act.

Over 10 years, if you assume even spending, it’s about $8 billion a year. I’d suggest to you it’s not going to be even spending.

I would also clarify for the audience here that current Congress can’t tie the hands of future Congress. So what we have here is as long as we have a Democratic president — the next two years — IRS is good to go. What happens in another two years? Well, that will remain to be seen.

Jonathan Curry: This is only about two years that this is guaranteed. What does the IRS need to do in these two years to give themselves the best chance of holding onto this cash for a longer period of time?

Robert Kerr: The Treasury secretary, per recent statements, has said, “All right, IRS, I’ve given you a big homework assignment. You’ve got six months to produce a spend plan. What are you going to do with it?”

The fact that Treasury’s asking for it, I think, is significant and meaningful. I think that’s also gotten lost in the shuffle here. It’s not, “Here’s $8 billion a year, just have at it.” Treasury is going to be keeping a pretty close eye on it, because the agency has to succeed here.

To your question then, what do we expect from the plan? Well, I believe we need to see something that instills confidence that the agency in fact has a plan, that the plan is a reasonable one, and that it’s achievable and accomplishable, if that’s even a word.

Set down the marker, “Here’s where we’re going. Here’s how we’re getting there. Here’s some intermediate milestones.” Otherwise, how are people who have legitimate oversight responsibilities providing oversight?

Jonathan Curry: There was a provision actually in the Inflation Reduction Act itself, at one point, that required the IRS to issue this report within six months saying, “Here’s what we’re going to do.”

Robert Kerr: And then milestones or interim reports. Then they got peeled out. It was a Byrd dropping.

Jonathan Curry: Yeah. The Senate parliamentarian ruled that you can’t include that provision for their various procedural reasons—

Robert Kerr: The reconciliation.

Jonathan Curry: The reconciliation. Yeah, it was a lot of fun. I love the Byrd rule jargon that comes with that. A lot of creativity there.

But then I guess we got the next best thing. Treasury Secretary Yellen wrote a letter to Commissioner Rettig, essentially ordering the IRS to do this. “We’re watching you. Work with us on this.” Because this is a pretty high profile thing for them, right?

Robert Kerr: It’s enormously high profile. This is precisely wrong, but roughly right.

IRS is probably some 90% of Treasury in staff years and budget. Historically the expectation from Treasury to IRS is, “Go do whatever you’re going to do. I don’t want to see you above the fold. I don’t want to see you in the Post. I don’t want to see you in the Times. I don’t want to see you above the fold.”

In this case, the infusion is so significant, and I think that the stakes are so high, that Treasury just simply has to be involved.

Jonathan Curry: At this point, there’s been a lot of criticism that the IRS isn’t prepared to spend $80 billion and that sort of thing. Do you think a lot is hinging on this six-month report to tamp down that criticism?

Is it a major opportunity for the IRS to say, “Hey, we got this. We can handle this,” and if they screw it up, that might start the voices chattering in Congress saying, “Well, maybe we should make it $60 billion,” or something like that?

Robert Kerr: I think there were two pieces to it. The one that I found more interesting was this notion of, “Well, you can’t spend that.” Somehow that there’s a throughput problem.

I think that there’s some truth to it, in the sense that if the agency is built right now as a $12 billion agency, how do you actually turn that into a $20 billion agency?

In my estimation, there are some challenges in that proposition. How do you hire? Going back to 87,000— which is not 87,000 armed people coming into your grandmother’s village, but it is roughly 87,000 people in.

Just the hiring process, how do you do that? IRS is suggesting 5,000 people in the early years and then ramping up to 12,000 people a year.

Without turning this into a monologue on the challenges of federal hiring, I would suggest that it’s hard. It’s harder than it looks.

Jonathan Curry: The IRS has money now to hire for taxpayer services, phone assisters, and things like processing. What they’re running into is it’s hard to keep those people in a period of low unemployment when you’re competing against Amazon for similar jobs.

Robert Kerr: This isn’t IRS’s fault, to be clear.

The federal hiring process is you post, it goes to usajobs.gov or whatever that is, and you log in and you have to create something that looks like an SF-171, because, of course, it’s the federal government and we have a form for that.

Then it goes off to IRS, and into the void, and takes however long to hear, if you ever hear. Then background checks add even another layer of complexity and time. Next thing you know, it could be eight months before that person is onboarded.

Who wants to wait eight months to figure out that, “I get to go answer questions for IRS?”

Jonathan Curry: When you could be getting paid basically the same or more at a private competitor and be hired next week. It’s a challenge for them, and it’s a hard one to figure out the answer to.

So this $80 billion is coming at an interesting time. It’s right as Commissioner Rettig’s term is set to expire. I believe November 12 is his last day holding that position. So this next person taking the role is going to be really overseeing this effort.

Who should be next for this? Any thoughts on what the candidate should look like?

Robert Kerr: I agree with you, Jonathan, that the timing appears to be fortuitous. That the funding supplement appears on the horizon at the same time a new commissioner is coming in for a five-year term. That is good, to my sense. I think most people who follow tax administration think that’s good.

Begging the question of, “Well, then who’s the perfect candidate?” Different folks are going to have different biases, I suppose. I would like to see someone who once again goes back to more of a Charles Rossotti model. Someone who brings in some significant large organization, private sector, customer service modernization, IT chops.

Jonathan Curry: Absolutely. That’d be sort of a contrast to what we currently have now.

I think Rettig has been something of an anomaly in the past two decades or so, since the IRS Reform Restructuring Act. Rettig is a tax professional. He served as a tax controversy attorney partner at a firm out in California for a couple decades.

Most of the commissioners, appointed ones at least, were, as you described, more of a Rossotti type, with private sector management type experience. You think that’s probably better for the moment now?

Robert Kerr: Sort of a bit of inserting history here. Prior to RA ’98, commissioners were tax attorneys. That was the model back in the day. So I think that tax is one of those funny industries that we hang out here forever. And so people who go, “Oh, they’re in Radioland and Podland,” are going to be saying, “But wait, no, no; it’s not that way.” You have this long history of tax attorneys.

That said, you don’t have a long history of IRS getting a 70 percent supplement for the next 10 years and asked to do the things it’s going to be asked to do.

My preference would be to see somebody who has that level of expertise, again, in customer service, IT, accounts management experience — who should be bringing in or consulting with people who have real tax experience.

Because when the rubber hits the road, the agency is a tax authority. Bringing in somebody who has those technical skills without having the ability to marry them to what it is the agency actually does will present its own challenges.

Jonathan Curry: How important is this role really? Do IRS commissioners really leave their mark on the agency, or are they more like a figurehead at the top, stewarding the sprawling bureaucracy?

Robert Kerr: Oh, I absolutely think that they can and do make a difference.

The question then here of how important. I’d say it’s very important. It sort of begs the question of, when are we going to see another commissioner coming around the mountain? Given that we don’t have a nominee yet.

Jonathan Curry: It’s a presidential-appointed, Senate-confirmed position. That process, in your experience, takes a while. Correct?

Robert Kerr: The process or the length of time between a president making the nomination and the full Senate approving that nomination can be lengthy.

For the nominee it can be both tedious and intrusive. This is one of Bob’s pet peeves, that we subject people who are highly qualified to a process that is so distasteful and we ask them to put their lives on hold during it. I wouldn’t want to undersell that the process itself is a challenge, to put it kindly.

Here we are without a nominee and it’s September. If we had one tomorrow, I’d suggest we’d be lucky to see him or her on the job in six months. It’s going to be a while. Sooner is better than later.

Jonathan Curry: Is there a possibility that since this has now become sort of a high-profile initiative of the Biden administration that they might try to accelerate things a bit?

Robert Kerr: Sure, Jonathan. Anything’s possible, so I wouldn’t say no.

Recent history has shown us that it takes a long time to get a commissioner nominee. For instance, Rettig was about a year late onto the job, given what the five-year term is.

The other issue — and this is, I suppose, tilting at windmills — is the administration knows that the commissioner will term out in November of ’22. It has known this for four years. The prior administration was just a matter, but this one has known for a while and we don’t have a nominee. I don’t know whether that’s simply a question of priority or a question of how do you find someone willing to take that job.

Jonathan Curry: Yeah, it’s a big ask. I did do an article recently where I spoke with former Commissioner John Koskinen, who held that job a couple years ago. He said that that might be an exciting opportunity.

It wouldn’t have been before the IRS got this funding, when they were just trying to keep things afloat while being constantly short on cash, and being yelled at by Congress every other week. But with $80 billion to spend, for the right person it could be an incredibly attractive opportunity.

But, like you mentioned, Congress nomination vetting process can be brutal.

Robert Kerr: Jonathan, I completely agree with Koskinen on that assessment because without that it’s just beatings will be administered until morale improves, and you get to trot over to the Hill and have somebody yell at you.

In this new environment, you might have the ability to make real change. That, I think, for a certain set of people is profoundly exciting.

Jonathan Curry: Bob, one thing that’s been included in this bill, that’s sort of a quirk, is that Biden has pledged he’s not going to raise taxes on those earning more than $400,000 a year. Of course to tax nerds, that gets a little bit messy when you try to say, “Well, how do you define $400,000 in income and things like that?”

But in the context of this $80 billion of funding, the Biden administration and its officials have gone through extreme lengths to emphasize that they’re not going to increase audits on those earning less than $400,000 relative to recent historical norms, which is somewhat of a fluid number.

I want to hear your thoughts on that. How does this actually play out? Is this going to hamstring the IRS? What’s your gut reaction here?

Robert Kerr: Lots of questions, so let me try to unpack them. I found extremely interesting the flourish, and I think it was from the secretary, and I think it was in a second letter, not the first, if I remember this order of events. From a second letter that came out, in which appeared a sort of throwaway line, saying, “relative to historic levels of enforcement.”

I thought that that was needful and wise, by the way, because, to me, it does two things. Number one: I believe that it adheres to the spirit of the pledge on $400,000. We could take a jolly romp here on whether $400,000 is really what middle class is in this country, but we’ll stipulate for the moment that it is. It gives IRS some room to navigate.

It acknowledges, by the way, that IRS audit coverage rate performance or any sort of coverage rate that you would consider in collection as well, has been on a decided downward trend. In exam IRS has tried to pick up the slack to do the annual report that shows the data book.

They, I think, have tried with some success to fill in the gap with correspondence audits. I think what we’re going to see here is real audits throughout the strata, because there’s room both below and above $400,000.

On the collection side you’ll see the same. I think collection presents its own sort of challenge because how do I know? If you haven’t filed a return, as IRS, I might have a sense whether you’re over or under. The agency needs a little space to breathe and this provides it.

I think it’s needful. I think it’s necessary. I think that most people would suggest that it’s ordinary and necessary.

Jonathan Curry: I also had a conversation with Nina Olson with the Center for Taxpayer Rights. She’s also a Tax Analysts board member. She pointed out to me recently an audit is a specifically defined term.

And so, saying you’re not going to raise audits doesn’t necessarily preclude other sub-audit type of enforcement activities. A soft notice letter from the IRS saying, “Hey, we think you owe this.” Is that an audit?

Robert Kerr: I’m on the same page with Nina on this notion of what is or what isn’t an audit, and she is known to be excited about this. I’m also excited about math error notices, which in fact are not audits, but they look and smell and taste like an audit. I think perhaps she was going there and I certainly don’t disagree with her.

Jonathan Curry: We’ve talked about how this $80 billion is really unprecedented, just in its scope, but are there any lessons from the past that the IRS can learn or put to work as it spends this money, and comes up with its plans? Maybe some pitfalls to avoid?

Robert Kerr: Of course there are. As you were asking in the question, my mind was flashing to the mall, to the archives building, where they have the statues outside that says on the one hand, “Past is prologue,” and on the other hand, “Study the past.” I think that that admonition is true here as well.

This is not the first time IRS has tried to overhaul its operations. It has a long history of these efforts which have had mixed success. I think that there is great value in figuring out what did we do well? Where did we struggle?

I had cheap seats for these things. I think the agency struggles in determining what it is building. Determining requirements, contracting out to have them build, and then incessant change orders.

You started by saying, “I want A,” and then you’re halfway through and you say, “I want A minus B plus C plus half of F.” It becomes a significant problem to get the work done when you can’t nail down what the requirements are.

Jonathan Curry: I know Rettig, at pretty much every congressional hearing I’ve heard him speak at, has always emphasized, “We need long term consistent funding.” He says that that’ll help with the start-stop and make it so that projects can be seen through to completion, hopefully. I know he envisions that as helping with that. Again, we’ll see how long term this really truly is.

Robert Kerr: Jonathan, if I may, I don’t want to leave folks with the sense that this is two-year money. It’s built as 10-year money, and it may in fact be somewhere close to 10 years in the payout. We don’t know though.

Because of that, I think we start talking about, “We know we can get things done in two years, so let’s go.”

Jonathan Curry: Any sort of potential pain points for the IRS in the next few years to watch out for? Things they should try to avoid, or that could end up derailing this funding? Or are these pain points somewhat inevitable?

Robert Kerr: When you ask are any potential pain points, I think, “Oh my gosh, yes, there’s all kinds.”

I think one of the struggles, if you’re within the agency doing — in your mind — God’s work is that there is no shortage of Monday morning quarterback and no shortage of people taking pot shots from the cheap seats. To lead there is to have a thick skin.

There is that, because there’s going to be all kinds of critiquing going on. The success of the enterprise, I believe, is going to be predicated on having a solid workable plan. One that is understandable, and one in which IRS is talking about its progress.

I think that there’s opportunities, as well, for the agency to recast itself here through the process. I like an idea of recasting itself more as a service. We look at what we do through the prism of taxpayer service through any part of the taxpayer cycle, which would be prefiling, filing, and post-filing. Throughout that entire time frame, the agency is there to provide service.

In some cases, post-filing service, people aren’t all that wildly excited about because it’s enforcement. It is part of the whole, and it doesn’t mean that it can’t be done through a service prism.

Jonathan Curry: One of the critiques I’ve heard from Republicans has been that it’s for the IRS, but the $80 billion is broken up into four different accounts. One is about some $40 billion for enforcement, and then the rest is divided up amongst taxpayer services operations like keeping buildings running and IT modernization.

Do you think that these two objectives of really making the IRS more taxpayer service focused, thinking about things from their perspective, can jive, if you want to say, with the pretty clearly big allotment towards enforcement in particular? Do you think that that could be worked together?

Robert Kerr: Absolutely. Jonathan, I’m so glad that you raised this issue. You’re absolutely correct.

At the highest level, it’s roughly $80 billion. It’s a little less. About a little more than half of that, $45.6 plus or minus billion for enforcement, you’ve got about $25 billion for operational support. You’ve got $4.75 billion for business systems modernization, and then $3.18 billion, which in most worlds is a lot of money for taxpayer service.

But it begs the question of, without being too cute about it, what is taxpayer service? I would argue, in this context, a taxpayer service is toll free, 1-800 TAX 1040, walk-in. Maybe parts of the IRS website falls under the rubric of taxpayer service.

But let’s walk around to look at enforcement. How much of that is revenue agents and revenue officers? How much of that is responding to a CP2000 notice or a math error notice?

So you get the notice from IRS, “We’re adjusting your balance due by X thousand dollars.” You pick up the phone and you talk to somebody. Is that customer service? I would argue, yes. I would argue, in that case, that’s coming from the $45.6 billion enforcement bucket.

As we think about this, I think that that’s an important issue to drive home.

Jonathan Curry: That does it for my questions. Any last parting thoughts just about the fact that the IRS has this big grant of money? Anything that our listeners should walk away with?

Robert Kerr: Jonathan, I know this is trite but I’m going to say it anyways.

Failure is not an option here. This is a once-in-a-generation opportunity for the agency to modernize, to meet the expectations and needs of taxpayers, and it simply has to succeed.

Frankly, it’s in everyone’s interest that the agency does. It’s in taxpayer’s interest; it’s in industry interest; it’s in tax professional interest. We should all be rooting for and doing everything we can to help.

Jonathan Curry: Bob, thank you so much for being here with us today. It’s been a pleasure talking with you.

Robert Kerr: The pleasure’s all mine. Thank you for the invitation.