Desperately Seeking Subject Matter Experts: The IRS Looks to Outsource Revenue Agent Training
- Jan 18, 2024
It is no secret that the Internal Revenue Service has been lacking in resources for a number of years, even before the COVID-19 pandemic. Years of increasing cuts to IRS funding have significantly impacted the agency’s ability to accurately assess and collect tax. Enforcement activities (i.e., audits) have suffered acutely due to this lack of resources, including a lack of sufficiently trained personnel.
This lack of resources has led to historically low audit and enforcement rates. According to a recent report by the IRS, the audit rate of corporations with assets over $10 million declined drastically, from 10.5% in 2011 to 1.7% in 2019. During that same period, the rate of audits of high net worth taxpayers declined from 7.2% to 0.7%. Perhaps most alarming is the rate of partnership audits, especially given the rise in the number of large partnerships in the last decade. Despite specific attempts to focus on large partnership audits in the past, the 2019 audit rate was merely 0.05%.
New Funding, New Resources?
To address some of these issues, Congress passed the Inflation Reduction Act (“IRA”) in August of 2022. The law provided the IRS with an additional $80 billion over the next decade in addition to its yearly appropriation amounts. The funds are intended to supplement IRS operations support and enhance enforcement activities. The law earmarked $45.6 billion for IRS enforcement efforts on high-end noncompliance -- i.e., high net worth individuals, partnerships, and large corporations -- in order to reduce the tax gap (the amount between which taxpayers owe and what they pay). To that end, the IRS announced in September of 2023 that it would be hiring more than 3,700 employees, with a focus on increasing the number of revenue agents. These employees will need to be well-trained in complex tax issues involving these high-end taxpayers, as they are frequently involved in complex structures and international financial arrangements.
Current State of IRS Training
In response to Congressional directives to focus its resources on high-end noncompliance, the IRS stated that it will create the “IRS University” (“IRSU”) to serve as a centralized learning function. The IRSU was developed in accordance with the edict from the Taxpayer First Act of 2019, which requires the IRS to develop and submit a comprehension training strategy to Congress. However, without sufficient funding, the IRS has repeatedly pushed back the launch of the training programs. The IRS currently estimates the IRSU to be launched sometime in FY 2024, which ends on September 30, 2024. Accordingly, it may be several months before it is operational.
A TIGTA report released August 31, 2023, found that despite the hiring of new enforcement personnel to focus on high-income taxpayers, new hire training has not directly addressed issues that may arise from audits of such taxpayers. Revenue agents performing audits on large entities are generally not cross-trained to understand issues arising with respect to small business and individual returns, and vice versa. In fact, the report notes that training on high net worth individuals is considered a specialty, with training offered only when necessary.
Potential Future for IRS Training
In light of these issues, the Large Business and International division of the IRS is looking to award a government contract to third-party vendors who can provide subject matter experts (“SMEs”) with advanced degrees and real-world experience. These SMEs will evaluate the quality and accuracy of existing technical tax training and create and deliver new training on complex tax matters to new and existing enforcement personnel. They will also be required to agree to cease providing tax advice to clients while providing training to IRS personnel.
SMEs are generally internal IRS employees, and they have historically assisted in developing and delivering technical trainings. While there is precedent for hiring outside consultants to act as SMEs for specific projects on an ad-hoc basis (for example, the Taxpayer Advocacy Panel may retain SMEs), this training project is much more in-depth.
Will Outside SMEs Cause Conflicts of Interest?
It seems likely that the IRS will award this contract to a large consulting or accounting firm that already employs SMEs with expertise in these areas. They will be expected to develop two main training courses for revenue agents focused on reviewing and addressing technical tax issues that relate to large partnerships, S corps, high income and high wealth individuals, and trusts. (One course will focus on partnerships, while the other will focus on high income and high wealth individuals.)
Query, then: How will clients of that firm react to the idea that their advisory firm is going to help the IRS in its enforcement efforts? Granted, the assigned SMEs will have to forgo private practice while performing the IRS contract, but clients may understandably be uncomfortable about the situation. Even if any conflict of interest is avoided, clients may not like the optics. While the IRS’s mission is not to collect as much tax as it can, but rather the correct amount of tax from taxpayers, clients may not appreciate the IRS having more ammunition in its arsenal to do so.
The IRS has a chance with their influx of funding to give their agents more resources and training than has been available for over a decade. Time will tell if this approach of using outside SMEs to create and implement training will bear fruit.
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Cindy M. Levine
Cindy M. Levine is a Senior Manager in the firm and has over 10 years of experience in providing services related to Tax Controversy matters.
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