Monday, November 3, 2014

SIXTEEN YEARS LATER: WAS THE 1998 IRS REORGANIZATION GOOD GOVERNMENT OR BAD GOVERNMENT?


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One of the best pieces of writing recently about  the IRS’s continued downward slide, is Professor Emeritus Frank Wolpe’s white paper[1], which was  published by the Taxation Section of the  American Bar Association in its NewsQuarterly, 2014 Winter Issue, as its cover story.[2]

Briefly, Professor Wolpe says the huge 1998 IRS Reorganization was wrong-headed because it scrapped a perfectly good organizational structure which included locally accountable districts and district directors for a “stove pipe” structure which put in place a “too top-heavy and hierarchical structure.” The result was to centralize power in Washington making tax administration a “remotely managed” governmental function with no senior-executive on site oversight.

I was a field office manager in the Office of Chief Counsel when the 1998 reorganization was put in place. It took the IRS four years to make all the changes. During that time, field office enforced collections almost came to a complete halt nation-wide and audit activity drastically declined. Once the new organization charts were drawn and everyone figured out to whom they were supposed to report, the basic jobs stayed the same but the chain of command was drastically different.

The management gurus in Washington were so smugly secure in the wisdom of their new-found stove pipe dogma, it was decided that it wasn’t even necessary for the Commissioner himself to know anything at all about taxes. As Professor Wolpe implies, the new conventional wisdom held that knowledge of Information Technology was all that was needed and the newly-appointed Commissioner was the first Commissioner ever to have neither a law nor an accounting degree.[3]  

 In spite of the new formation concocted by Washington, the good people of the IRS on the front lines eventually got back to work and the IRS enforcement numbers gradually got back up to more effective levels. Morale amongst the 90,000 IRS employees worldwide plummeted, except for those who actually got promotions, but the changes were cynically seen by the rank and file as essentially different labels on empty bottles.

The new structure was so tight it became much harder for front liners to move up the career ladder. Those who got stuck in the new Small Business/Self-Employed Division became jealous of those who were assigned to the sexier specialties in Large Business and International. It became almost impossible to move from the former to the latter. Transfers and promotions from within the IRS became a whole new ball game.  Managers started to play games with staffing models which favored the prestigious Large Business folks. Managers in the Small Business division became embittered like Minor Leaguers who got what was left over after the Large Business big boys picked over their top draft choices.

Career insiders  still working for the Service say morale has never recovered since the 1998 convoluted scheme was put in place, but the front line troops at the IRS have somehow managed to do their jobs in spite of the mess caused by Washington.

Professor Wolpe’s wakeup call comes sixteen years after the big changes but most of us working at the Service on the front lines knew right away what outsiders are only realizing now. It made no sense whatsoever to have people working in California report to a manager who was somewhere in another state or at worst, back in slow-moving Washington.

In the old days of the district director, the IRS field organization was structured around an agent, revenue officer, or special agent who reported to a group manager. The group managers in turn reported to a division chief. The chiefs of collection, examination and criminal investigations in turn reported to an on-site district director who was usually a career-type person with a strong substantive background in either “exam” or collections. He or she would meet regularly with their division chiefs in staff meetings.

The staff meetings with the district director were sometimes fun. As the DD’s “consigliore” (i.e.,, District Counsel) I got to sit in. The DD’s staff meetings promoted comradery and were often rather mirthful. It was a chance for the chiefs to hear what was going on in their counterparts’ areas of specialization. The DD would go around the table and have each division chief report on hot current topics and cases in their inventories. It was not uncommon for the DD to ask his examination chief, “Your revenue agent is taking WHAT(!?) position in this group of cases? You need to set up a meeting with me and your agent so that I can find out what this is all about! It might also be a good idea to have Counsel present.”

The districts reported to regional offices which, as Professor Wolpe says, were sometimes staffed with deadwood, but the main point is there was someone in almost every big city or at least in the state who had an eye on the big picture. This served as a “self-protective structure for early detection and correction” of potential problems.

It’s hard to say if the Tea Pot Scandal in Cincinnati could have been avoided had the old structure been in place since the exempt organization field structure has been closely coordinated with the National Office for many years. That said, so far, it seems that Lois Lerner’s worst mistake in the whole affair was not paying enough attention to her “aging reports” assuming her immediate staff was providing them to her on a regular basis. “Early detection” of the fact that local field people were not getting the guidance they needed in trying to figure out exactly what a section 501(c)(4) organization really was in the first place, could have avoided a made-to-order fall guy for the many IRS detractors in Congress.

One of the most frustrating aspects of the post- 1998 IRS Reorganization for practitioners is the apparent lack of accountability on the part of lower and mid-level managers. Agents still report to group managers but group managers now report to area directors who may be stationed at posts of duty almost anywhere. They in turn report directly to the titanic, muscle-bound National Office which is so big and redundant it has only two speeds, slow and slower. As Professor Wolpe points out, under the stove pipe current structure, the flow of information is restricted “like heat within a plumber’s pipe, to up-down movement through its long narrow shell, which inhibits or prevents cross-organizational communication.” The danger of the stove pipe model, as we see from the IRS today, is that it “tolerates top-to-bottom remote distances between management and staff” and promotes “isolation from other branches of the organization.”

The IRS has never been generous about giving out phone numbers of its people in Washington but for the practitioner who sometimes needs to “elevate” an issue to a higher level manager, there is often really no one to talk to. Some front line workers make it obvious they are merely mouthing messages from someone from afar but nevertheless insist that everything go through them with no direct communication with the real deciders.  

Even when an agent is willing to admit that some puppeteer is really calling the shots, their “industry specialist” is usually in some other time zone and is hard to get ahold of, while the manager is three hundred miles away in the other direction.  It is not uncommon to require an agent or even an appeals officer to have their work on a single case approved by two or more managers in different locations when there are multiple issues in a case. 

This is not to say that the IRS isn’t in woeful need of specialization. One of the reasons the tax shelter era lasted so long prompting the enactment of the TEFRA partnership audit procedures is because it took the IRS so long to figure out what the super high-priced lawyers and big-eight promoters were fabricating[4] before the epidemic spread so fast and so far.

Another example is how offshore tax evasion was allowed to fester for decades. The IRS is only now in the 21st Century, figuring out that this should have been one of their main areas of focus for years, because of the lack of training in the international arena.

Professor Wolpe has laid down a gauntlet for IRS reform and it remains to be seen whether Washington has the guts to take it on.

It is every American’s birthright to be skeptical of the tax man, but the lack of respect for the IRS presently is not a situation which should be tolerated much longer.     

 



[1] A White Paper on Executive Action to Restore Trust in the Internal Revenue Service by Rebuilding Field Operations
[2] You can read a copy of Professor Wolpe’s paper here.
[3] While the IRS pays lip service to its dedication to improve IT, how ironic that at the same time, revenue agents, revenue officers, appeals officers and IRS Counsel are not allowed to communicate with the public via email. Also, despite the great push for e-filing, the audit cycle from Exam to Appeals to Counsel and the Tax Court is still held hostage by the reliance on a paper file.
[4] Blogger and leading practitioner Jack Townsend smartly refers to them as “bull shit tax shelters.”