Shrinking the Tax Gap Requires a Renewed IRS Workforce
Congress must give the agency statutory authority to develop and implement a new set of civil service rules if it is to hire and hold accountable employees with the necessary skills.
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The Biden administration estimates that uncollected taxes may amount to more than $7 trillion over the next 10 years. The White House proposes to reduce that gap by providing the IRS with long-term funding to invest in technology and rebuild the agency’s workforce. That workforce has been steadily declining for a quarter century, dropping about 20% in just the last decade alone, and the administration’s 10-year plan would add thousands of new IRS staff members, in addition to replacing those who will be retiring. This plan presents a major opportunity to build the IRS of the future, but it also presents a major challenge as well.
Why? Because rebuilding the IRS workforce is not just a numbers game. Rather, in addition to replenishing its ranks, the agency must redefine the skills and expertise required of those employees, and then recruit, train, deploy and, above all, hold them accountable for successfully shrinking the tax gap. An integral part of doing that is providing first quality service to every taxpayer who interacts with the IRS
That is a formidable challenge under any circumstances, but it is exacerbated by a current civil service system that is just not up to that task. If the administration and Congress want to improve service and reduce the tax gap, they must give the IRS statutory authority to develop and implement a new set of civil service rules that will enable it to do so.
The IRS of the Future
The Biden administration’s proposal seeks to reduce the amount of tax revenue that is owed but not paid every year, known as the tax gap. One problem is taxpayers’ underreporting of income from sources other than wages and interest, but improving compliance will require new skills. In addition, the IRS has taken on new programs (like the child tax credit) and expanded missions (like the disbursement of COVID-19 stimulus checks), which require improving service to all taxpayers.
The IRS will need new skills and expertise, not just at the top—with senior leaders who understand and can leverage tools, and technologies to implement these new policies—but also in the rank and file. The agency needs specialists in applied information technology (such as AI and machine learning); data scientists and analysts; accounting and tax professionals with expertise in specialized areas such as partnership accounting; systems architects; and cyber security experts.
To be successful, the IRS requires a workforce that is not only numerically larger but also fundamentally transformed from a skills standpoint.
Attracting Highly Qualified People
We are confident that given the right tools and the right leadership, the IRS can attract and retain more than enough highly qualified people at all levels to lead the agency to the future we envision. Part of the attraction for new hires should be the opportunity to play a role in achieving a vital national priority: transforming one of the federal government’s most important institutions.
But appealing to that mission alone won’t be enough to offset the basic dynamics of the labor market or the limitations of the current civil service system. Thus, while the IRS may not have to pay its future employees top dollar to attract and keep them, it does have to provide them compensation that is comparable to what they could earn in the private sector. And it certainly cannot ask its operational units to wait for months to bring them on board, or to wait years to decide whether they can do the job. These are all limitations of the current civil service system, and if the IRS is going to be able to do all that is expected of it, those limitations must be overcome.
Give IRS a 21st Century HR System
The rules and regulations that comprise the current civil service system are not up to the task at hand, especially with respect to hiring, compensation, and accountability. Core elements of that system are almost 75 years old, and no part of it has been around for less than two decades. It is unrealistic to expect the IRS to rely on that system to transform itself.
The recent report by IRS’s Taxpayer Advocate Erin Collins is especially instructive. The Taxpayer Advocate points out that the agency stands to lose thousands of skilled employees over the next several years, losses that are not only driven by normal attrition (retirements and resignations), but also by the frustration employees feel in working for an agency that has seen its mission expand while staffing contracts. But it is not enough to just replace the personnel losses—IRS needs to hire for skills it doesn’t currently possess. As the TA also notes, IRS takes over 120 days to fill a job; its HR operation is also unlikely to be up to the task of refilling its ranks any time soon.
We agree with Collins that the IRS needs to dramatically transform its HR processes if it is to successfully replenish its ranks. The good news here is that there are many ways to do that, especially with the right statutory tools and state-of-the-art technology. But none of that can happen under the stringent limitations of the present civil service system, which is not built for speed, pay comparability, or accountability.
For example, we know that salary rates under the current General Schedule significantly lag the private sector for many job categories, not only as a general matter, but specifically when it comes to jobs that require the advanced technological and analytical skills the IRS needs. The IRS can selectively use direct hiring authority, a tool that lets agencies make on-the-spot offers of employment. But to approve it, OPM requires an agency to make specific determinations that it cannot attract sufficient numbers of even basically qualified job candidates to fill its vacancies (our emphasis). It is like saying you don’t want the best people you can attract, just anyone with some basic skills. That will not work for the IRS in today’s economy. As Commissioner Rettig recently testified, the IRS is often “outgunned” when dealing with sophisticated taxpayers and their representatives.
Without more personnel flexibilities than the current system has to offer, the IRS will not be able to attract, hire, and retain the highly qualified people it needs.
Follow the Lead of Other Agencies
The IRS was the beneficiary of statutory personnel flexibility in the late 1990’s, the last time the agency underwent a major transformation. The provisions were included in the historic 1998 IRS Restructuring and Reform Act. We think it is time to take similarly bold steps.
The good news is there’s a model for this: Other agencies have been down this same path, and under circumstances similar to those facing the IRS today. For example, after the financial crisis of 2008-2009, Congress, via the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), gave federal agencies responsible for regulating the nation’s banking and financial systems—the Securities and Exchange Commission, the Consumer Financial Protection Board, and the National Credit Union Administration, among others—statutory authority to create their own “excepted” civil service systems.
Most importantly, those agencies received the authority to hire more quickly, set pay over and above General Schedule salary rates, bring in retirees without penalty and hold underperformers more accountable—all so that they could better compete for, recruit, and retain top-notch talent. And in the case of FIRREA agencies, that talent included sophisticated accountants, financial experts, attorneys, data scientists, technologists, and economists required to regulate Wall Street. These are exactly the kinds of high demand/high-tech employees the IRS will require.
We advocate providing the IRS the same statutory personnel flexibilities afforded the financial regulators. And we note that in the case of the FIRREA agencies, those flexibilities have the added benefit of being successfully exercised in collaboration with organized labor; indeed, the National Treasury Employees Union, which represents IRS employees, also represents employees at the FIRREA agencies, and it has negotiated collective bargaining agreements with the agencies that effectively implement those flexibilities.
Would the IRS be able to take advantage of these flexibilities?
On this point, we are more optimistic than the IRS Taxpayer Advocate, who has expressed concerns. Our optimism is grounded in two reasons:
First, with the right set of flexibilities, there is ample precedent for a successful hiring surge that would replenish an agency’s ranks with new, more highly skilled employees. A good example is the U.S. Intelligence Community after the 9/11 attacks. Before the attacks, the IC had been strangled by incremental, non-programmatic budget cuts and hiring freezes that had severely reduced its ranks by thousands of intelligence officers and analysts. Following the attacks, the IC rapidly surged to meet the threat, hiring thousands of new employees with critical language, analytical, and operational skills, mostly using the very “excepted” personnel rules we advocate. And during the time that it took to develop those new hires, it was able to bring back thousands of former employees—retirees who knew the work but who had moved on—without requiring them to sacrifice part of their well-earned annuities, yet another flexibility made difficult under current civil service rules.
So, given the right tools, how can the IRS do it? By working with OPM and its sister FIRREA agencies to leverage interagency “tiger teams” of HR experts, augmented by re-employed annuitants and contractors, dramatically re-engineered work processes, and state-of-the-art HR technologies to implement the surge. It will take time. If the administration and the Congress take a similar approach for the IRS, they should be prepared for that. But it can be done without sacrificing the quality demanded by the IRS mission.
Accountability and Oversight
Some critics may argue that the FIRREA agencies have been given too much flexibility, without concomitant oversight. We believe this concern should be addressed and there is precedent for doing so here as well.
For example, several years ago, Congress gave the Homeland Security and Defense departments FIRREA-like legislative authority to establish “excepted” personnel systems that would enable them to better recruit, develop, pay, and retain their civilian cybersecurity cadres. But those flexibilities were tempered by the additional statutory requirement that Defense and DHS seek and receive OPM approval for internal regulations that would implement them. That is something OPM has done in several other instances as well, most notably with elements of the Intelligence Community and its multi-agency set of “excepted” personnel authorities. It made sense then, and we think it makes sense now.
If the Federal government is to improve service and reduce the tax gap, it will require an IRS that has state-of-the-art information technology. But while that technology is important, replenishing the workforce is equally critical, in large part because that technology has to be acquired, implemented, and effectively leveraged by capable IRS civil servants.
It is clear that after years of hiring freezes, the IRS workforce, through no fault of its own, suffers a deficit. Replenishing those ranks—with the flexibilities that can only come with a new, modern personnel system—must become a priority.
Charles Rossotti was appointed by President Bill Clinton in 1998 to a five-year term as IRS Commissioner; he is currently with the Carlyle Group and serves on a number of corporate boards. Ron Sanders, now staff director at the University of South Florida’s Florida Center for Cybersecurity, was Commissioner Rossotti’s Chief HR Officer from 1998-2002 before becoming associate director of OPM and later chairing the Federal Salary Council