TEI's testimony before the IRS Oversight Board: January 26, 2004

Tax Executive, The,  Jan-Feb, 2004  

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On January 26, 2004, TEI Executive Director Timothy J. McCormally testified before the IRS Oversight Board on key challenges facing the Internal Revenue Service. The testimony was prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Paul O'Connor of Millipore Corp.

Good afternoon. I am Timothy McCormally, Executive Director of Tax Executives Institute, the preeminent association of business tax professionals. I am accompanied by the Institute's General Counsel and Director of Tax Affairs, Fred Murray. The Institute is pleased to participate in today's hearing of the IRS Oversight Board.

Background

Tax Executives Institute was established in 1944 to serve the professional needs of in-house tax practitioners. Today, the Institute has 53 chapters in the United States, Canada, and Europe. Our 5,400 members are accountants, attorneys, and other business professionals who work for 2,800 of the leading companies in North America and Europe; they are responsible for conducting the tax affairs of their companies and ensuring their compliance with the tax laws. Hence, TEI represents the business community as a whole, and our members deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on almost a daily basis. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike.

The companies that employ TEI's members have almost without exception been assigned to the IRS's Large and Mid-Size Business (LMSB) Division. The largest 1,600 taxpayers within LMSB are subject to ongoing audits as part of the Coordinated Industry Cases (CIC) program. The Institute's testimony is largely based upon our experience with this segment of IRS operations. TEI has long supported adequate funding for the IRS, particularly in respect of training. We are pleased to offer our views on the investment in human resources within LMSB and, more generally, on the overall direction of the IRS.

Increased Demand, Decreased Resources

Effective management of human resources is not a new challenge, but it is one that is garnering more attention and importance as the government's workforce ages. The Office of Management and Budget recently announced that all federal agencies will be required to include in their fiscal year 2005 budgets and annual performance plans specific activities relating to training, development, and staffing to ensure leadership continuity. The Office of Personnel Management has also established a goal to ensure continuity of leadership and knowledge through succession planning and professional development programs in 25 percent of federal agencies by July 2004.

The IRS Oversight Board's 2003 report to Congress also focused on personnel issues. The Board observed an increased demand for IRS services and a decreased level of resources. Specifically, the Board documented a 16-percent increase in the IRS's workload between 1992 and 2002 and, during the same period, a 16-percent decrease in the number of full time equivalent employees (from 115,205 to 96,714). The Board explained that the result of these trends is a huge gap between what taxpayers need and what the IRS can deliver to them. Closing the gap is one of the IRS's greatest challenges, the Board concluded. (1)

Nor is the United States alone in its need for a stable public workforce. For example, last October the General Accounting Office reported that in Canada approximately 80 percent of the public service executives and executive feeder groups will be eligible to retire by the end of the decade. (2)

In an exit interview last year, former LMSB Commissioner Larry Langdon reported that during his five years at the IRS the LMSB workforce declined by 600 employees. Forty percent of LMSB's revenue agents will be eligible to retire in FY2006, and that number will rise to more than fifty percent in FY2008. Among the division's managers, approximately forty percent are currently eligible to retire.

These statistics underscore what may be the greatest challenge for the IRS over the next five years--its personnel. LMSB is responsible for ensuring compliance by approximately 180,000 entities each of whom has more than $10 million in assets. These taxpayers are the largest enterprises, and correspondingly have the most complex issues and the most complex organizational structures. They themselves employ qualified tax attorneys and accountants and, in return, they require experienced, well-trained agents to understand the complexities and to audit those returns. The success of the agency--and the LMSB Division in particular--depends on an effective, efficient, well-trained, and motivated staff.

Recruitment Drives

The LMSB Division has taken important steps to address the problem. For the first time last year, LMSB held two recruitment drives for mid-career personnel. For example, of the 200 new revenue agents hired last fall, approximately two-thirds were mid-career employees hired at the GS-13 level. These new employees generally had a minimum of five years' corporate tax experience and either were a CPA or held a masters degree in taxation. (Several were members of TEI.) The division will continue hiring midlevel employees in the same ratio this spring, assuming funding is provided in the FY2004 budget, though candor requires an acknowledgment that, as the economy improves, attracting high-quality candidates at existing pay levels may become more difficult.