IRS Commissioner Talks About The State Of The Service

IRS Commissioner Charles Rettig discusses the current state of the tax agency, including the paper return backlog, technology improvements, and hiring updates.

This transcript has been edited for length and clarity.

Cara Griffith: Welcome, everyone. I’m Cara Griffith, the president and CEO of Tax Analysts. Now, our guest today needs no introduction but it would be very impolite of me if I didn’t give him one.

As the 49th IRS commissioner, Mr. Charles Rettig entered the service as a known commodity with more than 36 years in private practice, representing taxpayers in both civil and criminal matters. Now, of course, during his long tenure in private practice, I would say he reached the height of his career when he wrote pieces of commentary for Tax Notes, back in 2010-2011. But in his time as commissioner, Rettig has shown that he believes deeply in the importance of the IRS’s work and the strength of its people.

We’ve got a lot to discuss today, and I want to thank the commissioner for taking time out of his very busy schedule to be here. Let’s get started.

Commissioner, it’s almost tax day. How is the filing season going so far? Could you give us a general state of affairs at the IRS?

Charles Rettig: First, let me say Cara, it’s a pleasure to be here. When I was on the outside it was a pleasure to be able to write what I thought, at least, timely articles. Frequently, if I was writing something, it was something I picked up from practice. Being out and about, whether it’s at conferences or otherwise. As you said, I’m a tax guy. I always introduced myself as a tax guy in the professional environment.

To me in tax, what somebody’s credentials are is only part of it. Tax administration, whether it’s from the private sector or the government sector, is important for the country. What we’ve faced at the IRS, certainly during the pandemic, I think has been important for the country. Also I would be the first to say as a tax guy with 36 years experience with a wife who is a tax preparer, the IRS has been anything but user friendly for tax professionals, and that’s not lost on anybody at the IRS, including myself.

Like everyone else, the pandemic hit us hard and continues to hit us hard. I will say today, and I’ll say after my term expires, I think we gave it our best. It’s very clear and it’s easy to say, “We didn’t always get it right.” But I would tell you that we tried our best and there’s a lot of limitations.

I’m not somebody typically who says, “Well, we didn’t have funding. Well, we didn’t have staffing. Well, we didn’t have this, or we had the pandemic.” My comments inside the IRS have been from day one when COVID-19 first started to surface: we have to operate. We don’t have a choice to sit back, wait, and see what’s going to happen and weather the storm, if you will. Everybody in the country is relying on us from one perspective or another.

The one issue that we needed to deal with is we were not able to operate in a virtual environment in February and March 2020. Today we are able to operate in a virtual environment. I’m very proud of the government and certainly the people at IRS and a lot of folks who helped us. We use a lot of contractors as well of the pivot that we did in March-April of 2020 into a virtual environment.

I’ll be the first to say from the private sector side, it might not be as noticeable. A lot of people can say, “Well, geez, IRS. you’re not answering calls,” or “You’re not this,” or “You had the mail.” If you look at it from our side, every effort was made by every person at the IRS to lessen the impact on tax professionals as well as taxpayers.

We shut down in March 2020, and recently I’ve been getting questions, “Well, when is IRS going to come back into the office?” We’ve been in the office since March of 2020. We operate in an obviously socially distanced environment.

In March 2020 our customer service representatives, who are the folks that answer the phones, only 3 percent were telework eligible. By the summer of 2020, 100 percent of them were telework eligible.

Your next question might be, “Well, then how come every time I call, I can’t get an answer?” You can’t get an answer because during the pandemic, at various points in time, we received between four and 600 percent of the highest volume of calls the IRS has ever received in history. At various points we were receiving phone calls at the rate of 1,500 per second. We had about 15,000-16,000 people total who could answer those calls.

Through COVID-19 funding, we were able to onboard an additional 1,000, and that doesn’t sound like a lot in terms of 1,500 calls per second. Or maybe in terms of 200 or 300 million calls. But I will tell you, every one of those folks is critical to us and critical to you. The people in this country deserve to have an IRS that answers the phone when people call, that responds when people reach in, that you can walk in and interact with people.

I hope to give you no excuses, but an understanding of where the IRS was, where it is, and certainly where it’s going forward from here. We had short-term challenges, which are pretty obvious today, inventories and phones, level of service and such. Hiring is another short-term challenge.

The long-term challenge isn’t funding. This agency should have been modernized 10 years before I came on board. It’s unacceptable for the stage it’s in today. It’s unacceptable for the agency to go forward without being a really state-of-the-art modern agency.

We touch more Americans than any organization on the planet, public or private sector. I think fiscal 2021, our gross revenue was $4.1 trillion. That translates into about 95 to 96 percent of the gross revenue of the country.

During the pandemic, we were the front line for the United States government. We were the people who talked to people who were holed up in their home for this or that. Maybe people called with respect to trying to get an economic impact payment (EIP) or a tax-related issue.

But I will tell you once they got on the phone with us, those calls very rapidly switched to people telling us their life story and the impact of the pandemic. They lost a spouse. They lost a neighbor. Things like that.

One area that you may not be supportive of, but I’m going to tell you that what we did, was I told our people to stay on the phone. We are the only people who are touching people in that scenario. Stay on the phone. Interact with them as a person. People in this country were going through something they had never gone through before. None of us had ever gone through before.

That raised our average call time by about four minutes. But when you look at the volume we’re trying to deal with, that impacted the ability of the IRS people to answer a lot of other calls. But we were trying to take care of the people who we could take care of, who we answered the phones for, and let them know that somebody cares.

Cara Griffith: That’s a terrific setup for the rest of the discussion. That was a very human approach for the IRS to take. I did not realize that the IRS is often put in the position where it is asked to do additional tasks above and beyond what would be its normal return processing tasks and does somehow muddle through.

Let’s get to the one of the biggest questions that I think is on the minds of everyone: the backlog. We’ve been through the pandemic. We are where we are. Is it realistic to think that you can get through the backlog of unprocessed returns by the end of the year? Is that a realistic expectation? There’s going to be challenges that we don’t yet know about that will happen. If you can’t, then what’s the backup to that?

Charles Rettig: Let me tell you that Chuck Rettig and Commissioner Chuck Rettig both are committed that we are going to be healthy by the end of our calendar year, December 31, 2022. We talk in terms of before we go into filing season 2023, and you have my commitment on that.

We are not operating on, “Well, there’s 39 weeks. We can process this many per week. Therefore, we do that many per week. Can we go home?” We have done everything we can to process as quickly as we can. We have tried things that a very risk averse agency never would’ve considered two years ago. We are looking to crush this inventory as quickly as possible.

If we finish up early, you’re not going to see us pat ourselves on the back because I would be the first to say, “We probably should have finished up early last year.” But our volumes were significantly larger last year than they are this year.

The last quarter of last year and the first quarter of this year have had a significant impact on where we are and where we’re headed. When you see IRS folks use the terminology about getting back to healthy, healthy is in the eyes of the taxpayer, tax practitioner, and tax professional. It’s not in the eyes of the IRS. Healthy for us is to run on a stable level and system.

Where are we currently? I’m going to throw out a couple of numbers with respect to current filing season, and then some backlog numbers that are really current as of this or last week.

Paper is the item that’s got the IRS on its heels. We received last year almost 17 million paper returns. For what seems like ever, the government has been saying, “Electronically file! Electronically file!” We came into filing season 2022, the current filing season, really pushing buttons to say, “E-file, request direct deposit, make sure you have an accurate return.”

To get an accurate return, we sent out 200 million reconciliation letters on the EIP payments that people received. Another 57 million reconciliation letters in the advanced child tax credit arena on the amount of payments they received. People received either six or seven of those payments during the last half of last year.

In total, we sent out 257 million letters saying, “Hey. This is how much you got.” We also said, “You can get an online account and you can check in your online account to see how much you got.” Well, why would we put all that effort in there?

Well, last year we had more than 10 million returns where people were unable to reconcile two EIPs. We knew this year, we’re coming into an EIP and advanced child tax credit payment. The idea was get as much information in the hands of the tax professional and the taxpayer, if they’re going to go out on their own, to be able to reconcile that.

I interacted with one large transmitter very early in this year. I heard that they were basically advising their franchisees to start collecting and sending returns in on January 4. We opened on January 24. I touched base and said, “We need your people who are preparing the returns to reconcile these numbers. We cannot get tens of millions of returns again where those numbers aren’t right because even an e-filed return, if those figures don’t match what we have, the filters kick them out and they go into a manual processing environment.”

We had almost 30 million returns that had to be manually processed with respect to reconciliation of EIPs, with respect to the unemployment compensation, the $10,200 being an exclusion. And with respect to the “lookback,” people who for earned income tax credits and certain other things could use their 2019 income instead of their 2020 income as a basis and basically, in theory, their 2019 income was higher so they would get a higher EIP.

The $10,200 and the “lookback” happened while we were already in filing season. Once we program our systems, we cannot go back in during filings and reprogram without seriously jeopardizing filing season, which means we don’t go back in. So, all of that had to happen manually.

Where we are now: Unprocessed paper returns is a current figure for individuals. Returns that we received during calendar year 2021, we have 2.4 million left. Not that long ago I was giving out numbers of 8 million to 10 million.

Paper returns received in calendar year 2022 is another 2.5 million. Those are not necessarily out of date. We are in filing season 2022. The paper returns that we have to process, the total there for Form 1040s right now is 4.9 million returns.

A big issue for a lot in the tax community, Form 1040-X during filing season 2022, we have 2.6 million amended returns in process. 1.6 million of those are over in what we call the submission processing side of the house, which generally speaking will be the less complex Form 1040-X’s, and 917,000 are in our accounts management side of the house, which will be the more complex ones.

Why am I telling you that? Because you’re about to hear that we’re doing a huge shift of Form 1040-X’s from submission processing side over to accounts management because the account’s management folks are well ahead of the curve in processing Form 1040-X’s. That’s a good sign.

Everything I’m trying to identify here for you is we’re trending in a really positive direction. People concerned about retention credit. We have 317 Form 941-X’s, and 1.8 million Form 941s. Those are being handled on an expedited basis to allow people to file the current return.

But the last statistic I’ll give you is unopened mail because I get a lot of inbounds, whether it’s from Capitol Hill or from others of, “IRS has this mail backlog.” We have been current on our mail for many months. We had 23 million pieces of unopened mail in July of 2020. This week we have 381,000 pieces of mail unopened, but that’s current.

Every week we receive between 1 million and 1.5 million pieces of mail. We process 1 million to 1.5 million pieces of mail. Unopened mail in the 300,000 to 400,000 range is typical. It’s not unusual.

Like in private practice, I never finished my last case. I always had an inventory of other cases. This is the same thing here in mail. So, mail is something that we have, if you will, overcome.

Well, why can’t we just go out and hire 10,000 more people and put them on the phones tomorrow?

The IRS has a unique accounting system, which I refer to as “buckets” and we get appropriated funds. We get X amount of dollars to put Y number of people on the telephones. That figure is determined two years before the year.

For example, right now, our budget work is being done with respect to the 2023 year. And we’re actually programming filing season 2023 now, while we’re in 2022. We always have that going on.

When your base year was a non-pandemic year, and then you have two years of pandemic, the math doesn’t work. What we were able to get in the pandemic was specific funding for another thousand employees. But know that I couldn’t take 1,000 employees, the dollar value, and move it onto the phones and be impactful. We had to come at it from other directions.

Why do I believe that we’re going to be able to get through this? March 15 of this year we got our budget. We went half of each year on a continuing resolution (CR), which says, “IRS operate on your prior fiscal year enacted budget.” We get our budget halfway into the year to know what our annual budget is. I basically get six months to figure out how to spend the money they give us. If we can’t spend it, it goes back. It’s one-year money, not two-year money.

We get the money and we try to do it. But the start-stop on the funding is just death for any organization, let alone the IRS to be able to build out a robust IT infrastructure and have this infrastructure built out, designed, implemented, et cetera.

Ten years ago we would’ve been answering those phone calls. We would’ve been processing that mail in a more timely manner. Instead, we’re somewhat caught on our heels.

You’ll hear people at IRS talk a lot about CRs. There have been more than 100 CRs since tax year 2001. Start, stop, start, stop, start, stop. It’s not unique to the IRS, but the IRS is the one that’s behind the curve trying to do this. What we got on March 15, Congress rescued us. I testified last week before the Senate Finance Committee, and can’t be more clear.

Congress rescued us, with not only a budget. They gave us direct hiring authority. What that means is we can hold a job fair. We got that authority on March 15. We started holding our job fairs in Kansas City, Ogden, and Austin starting March 16. We have brought on board more than 2,500 people in the last two weeks of March.

As an example, in Austin, we held a job fair. Five hundred people showed up with resumes. Five hundred people got job offers. We’re way over 90 percent on offers for people who show up in person.

We’re also holding job fairs virtually. It’s a lower percentage because they need to follow up. But the critical thing is to offer somebody a job and get them in our doors within 30 to 45 days. That is significant in terms of going forward. Those types of matters make a big difference.

Cara Griffith: There was a recurring theme throughout what you were saying on the use of technology and that technology is going to be really important to a modern IRS and for the ability of the IRS to serve tax payers.

One question that I was thinking throughout was whether the IRS is looking at different types of artificial intelligence and machine learning in order to improve processes?

I know most businesses are, even Tax Analysts, is considering how can we take some of the human nature of identifying a code section in a story and having a computer link to it so that we can have humans doing other, more sensitive, arguably maybe more important type of things.

What is the technology future for the IRS? Where do you see it going? How can that then lend to better taxpayer service?

Charles Rettig: Technology’s critical for the IRS to get to the “there” point, to get people the service that they deserve. We have the greatest country in the world and we have the greatest IT folks. The tech companies are here. They’re founded here. They stay here.

A lot of what people have to interact with — with all federal agencies, not just the IRS — is really unacceptable when you wrap it with the U.S. We should be the lead. We should be the ones that people go, “The IRS has this.” Unfortunately we’re not.

On April 16, 2019, we launched our business modernization plan, a six-year plan, $2.3 billion to $2.7 billion to “modernize,” to bring present day technology into IRS. $2.7 billion might sound like a lot of money, but at the same exact time that we announced that, two of the large banks announced that they were spending $12 billion to $14 billion a year for five years to do what we’re trying to do for $2.7 billion.

We launched this six-year plan. We came up with it internally. We had it reviewed by McKinsey & Co, which is an outside consultant. We adjusted for McKinsey’s plan and pushed some stuff beyond the six-year timeline. We launched in 2019.

As of today we’ve received 57 percent of the funding we should have received since 2019. You’ll say, “Well, then you must be 43 percent behind.” What we have to do, and every commissioner’s always done, is take funds from less visible parts of the agency. Move other things downstream because we cannot fail to modernize.

We’re behind where we want to be. But I have to tell you some of the hurdles that collectively we and people on the outside have had to cross during the pandemic could have been avoided if this agency was modernized 3 to 10 years ago. There are technologies that would’ve helped us tremendously during the pandemic. Unfortunately, a large portion of our technology budget goes for operations and maintenance. Basically the ability to keep the pumps running, to keep the lights on in the tech side of the house.

Let me also talk about the current budget for fiscal 2022 that we got March 15. There’s a lot of press saying, “Well, IRS got an extra $675 million. Isn’t that amazing? They ought to really be able to turn a corner.” Know that somewhere between $3 million to $350 million of that, so about half of that extra, goes for basically what I’ll loosely refer to as our cost of living adjustments.

We didn’t get that. We got $675 million. Basically cut that in half and the half is going to go to help fund projects that should have been done before I came on board almost four years ago. It’s a struggle.

Cara Griffith: There have been a lot of proposals on this increased information reporting, and that inevitably is going to be a burden on the IRS. If you’re getting in all of this additional information, how are you going to gather it? What are you going to do with it when you get it?

What are your thoughts on how the IRS is going to handle the prospect of increased information reporting, whether it’s from the American Rescue Plan Act of 2021 or some future legislation? Does the IRS have the resources to do something with this additional information that it might acquire?

Charles Rettig: As you know in the information reporting space, where there’s withholding and information reporting, something like 99 percent gets accurately reported. When you drop one of those lanes, it drops down considerably, and it goes below 50 percent without information reporting.

From a tax administration perspective, information reporting itself is helpful. I was and am supportive of information reporting in the virtual currency space, because we know if you look at the affidavits in the various “John Doe” summons cases, we know that information reporting and the receipt of information in the virtual currency space, people are challenged. I get it.

Some people say, “Well, I don’t know whether or how to report it.” The questions that are there are there for a reason. We ask straight up, “Did you have any such and such transaction?” We move it from three pages back to right under the signature line for a reason.

When you see us move something from one part of a return to another, read into it. It has a lot of internal attention and know that every space on a tax return is highly sought after. When we take up space on the first page, know that the IRS is focused in that arena.

Look at those “John Doe” summons. You will see that we know that there is underreporting in that arena. I’m not saying underpayment of tax because we have to look, but I’m saying underreporting.

It comes back to technology and funding to get us there. The best example I can get is go back and look at the Foreign Account Tax Compliance Act litigation. We got litigation to enact FACTA. We got legislation to enact FACTA. We did not get funding to implement FACTA in the terms of technology.

If you’re wondering, “Well, IRS has all this FACTA information and they’ve not been able to use.” We’re waiting for the funding, or we have to less visible to more visible, et cetera, type of a thing there.

Information reporting in my mind, in the virtual currency space, would be very well received. We need funding for that. Otherwise, you’re just building a bigger haystack to be out in the yard. By itself, those haystacks are not impactful.

Certainly, there’s a deterrent effect anytime you have information reporting, but you don’t burden people just to create a deterrent effect. As much as it helps to get information reporting, and maybe to open up some audits or this or that in certain spaces, it should also help us stay away from certain audits.

You mentioned AI a few minutes ago. that are conducted in small business are selected by AI. As you go forward, I think within two or three years, it’ll be 100 percent of the audits in the small business space will be selected by AI. Then you’ll see AI continue to enhance.

We have quite a few data scientists and analysts on board, and they’re helping us know where to go. But I like to say, as importantly, they’re helping us know not where to go. You can’t fault us for opening some examinations. You can fault us for staying in that exam too long or ignoring the obvious, if you will. I used to maybe make comments like that when I was representing taxpayers. But that was my job, to help the IRS understand what they’re looking at if they don’t.

In that space, we need funding, because we need to train our people. It’s unfair for us to train our people, if you will, at a taxpayer expense. We need to go to the right place with the right people who are trained. Who ask the right questions, who understand the answers. If the right move is to get out of that audit, we need to get out early, not just stay in it just because we happen to open that audit.

Information reporting overall is a big help for tax administration, but it needs to be channeled. It needs to be appropriate. It’s unfair to burden taxpayers in that space, particularly if it’s space that the IRS can’t use.

We need to get both pieces of that. We need to get legislation for information reporting. We need to give funding for the appropriate technology to be able to process that, to tell us where to be, and as importantly, where not to be.

Cara Griffith: Well, I want to give you a few minutes because I am actually very interested in what are you most proud of in your time that you’ve been at the IRS?

Charles Rettig: This is a unique agency. When I got on board, some people said it’s tax collection, tax examination, and tax administration. It’s at various points in time data processing, data collection, and all that. I get that people say that, and I was pretty familiar with the agency.

I probably knew 5,000 IRS employees on a first name basis when I came on. All of whom, by the way, were frontline employees. I’m not sure I knew too many executives, as they use the word around here. But I got it on the outside what’s there.

I’m proud to say that this is no longer a “brick-and-mortar” agency. This is a group of people who care about people. I’m hugely proud to be able to tell you that within a year or so, and hopefully less, the largest call center of any government agency will be located in Puerto Rico.

Why did we get to Puerto Rico? Because they had two hurricanes and an earthquake. I like to say the 20-somethings left Puerto Rico, and they’ll come back in 10 years when their parents’ generations rebuild the island.

We went in there with federal jobs, which are very highly sought after and praised. The first round we looked for 500 people, we got 600 qualified applicants. A benefit, but not the sole reason that we went there, is they tend to be bilingual in Spanish, which obviously helps if you have people on the phone that can handle something without going to the interpreter.

I will give you an example that the first group of IRS folks from here who went down there came back to me, and the person who came back to me is a pretty much a tough guy and the former Navy SEAL.

He comes in and goes, “Sir, you’re not going to believe what you did down there.” I said, “Well, what did we do?” I don’t do anything. This is a team effort. He says, “Well, a lady got a job.” The average compensation there is $21,000 a year. “She signed on with us. She got a $31,000 position with us and she was crying and crying. And she asked if she could give me a hug and I said of course.” She said, “You have changed my life. You have changed my children’s lives and you have changed my parents’ lives.”

Culturally, I hope my children understand that comment. My wife’s one of seven children and those seven children in Vietnam were the Social Security package for her parents.

This is all part of what we call our “Lifting Communities Up” initiative. I would hope to, at some point, see more written about this, if you will.

Number two, Mississippi Delta. We are wholesale going into the Mississippi Delta, Clarksdale and Greenville, Mississippi. Why are we going into Mississippi Delta? Because when I look for 2,000 positions in Austin, Texas, 600 applicants, 100 qualified, and we’re up against Amazon. We’re up against Target paying $20 an hour. We’re up against Amazon paying truck drivers $110,000 a year. I need to bring people in at $15 an hour. It’s not going to be a successful venture.

Mississippi Delta, how did we get there? We got there from the EITC heat map. There are more claims that we disallow in the Delta region than anywhere else in the country. Obviously the EITC is to help people in poverty and below levels and above, but people who qualify, who are eligible.

We’re going into the Delta with federal jobs. How are you going to do this? “Lifting Communities Up.” We’ve paired up with two year and four year institutions down there. We’re bringing high school Volunteer Income Tax Assistance into the high schools there.

People understand giving back. People understand the IRS. We’re going to create a pipeline of skilled employees. This is probably a six or more year project, and we are just now getting off the ground. But it’s a longer term project for the IRS to go into communities that are underserved, that are challenged, bring jobs in, skill the people in the communities with a hope that they stay with us. But if they don’t, we skill them up and they go somewhere else. Bottom line is they’re better off.

Rather than maybe a data processing or a tax collection or whatnot agency, what I’ve given to the employees here is we are a group of people. We’re a group of people who care about people. Expect us to go into communities as a method going forward. We have six different places, which we’re not going to announce, around the country that are equivalent to where we are now in the Delta.

The best way I can describe what we’ve seen from facilities down there. We were offered a closed school. We were offered a closed hospital. A community that has a closed hospital, a community that has a closed school needs federal jobs in that community to help support the community.

I want you to be proud. This is the IRS. It’s the people of the IRS. I might have opened that door, but I will tell you that our employees have passionately gone through that door.

We go down there. We do a lot of different things. Everybody who comes back from there comes back energized to say, “You know what? I work for the IRS. That’s my team that’s down there and I’m proud.”

I went over my two minutes, Cara, but I want people in this country to understand, in a broad perspective of IRS, is people who are working really hard, who have done their best to give you the services that you deserve. Who know we have not been able to provide those services, but we are trending in a good direction both for inventories, as well as, I think, skill sets and we need funding for the technology. The last thing I’ll say is we are hiring across the quarter.

Cara Griffith: That’s right. It’s a good plug.

Charles Rettig: I apologize for going over. I’m hugely thankful for the opportunity.

Cara Griffith: I think you have a lot to be proud of and I really enjoyed the conversation today. I’ve learned a lot. I learned things about the IRS that I didn’t know. I genuinely appreciate that you took the time today to come and talk to us. It was an absolute pleasure. I look forward to the next time that we get to talk. Thank you.

Charles Rettig: Thank you. Be well.