A New IRS Commissioner And The Promise Of More Efficient Tax Audits
WASHINGTON, DC - AUGUST 18: The Internal Revenue Service (IRS) building on Thursday, Aug. 18, 2022 ... More in Washington, DC. (Kent Nishimura / Los Angeles Times via Getty Images)
The Senate has officially confirmed that former Missouri Congressman Billy Long will serve as the IRS commissioner in Trump's second term. While some cabinet appointees have cruised through their confirmation hearings with limited scrutiny, Long did not have the same luck as many Senators expressed concerns over his checkered past. Long ultimately prevailed under the platform of reshaping the taxing authority to be more like a private sector entity. This article discusses why he faced so much scrutiny, what his vision can look like once instituted, and what recently published academic research says about the current and future state of the tax audit process.
Long was a sitting Congressman in Missouri from 2011 to 2022. Before joining the House of Representatives, he was an auctioneer and a talk radio host. He left office to run for Senate, where Long ultimately lost in the Republican primary. Following this stint, he served as a tax consultant for Lifetime Advisors and Commerce Terrace Consulting, followed by working as a realtor with Murney Associates.
Much of this variation in Long's background led to his nomination to be somewhat unique and trying. This scrutiny is headlined by Long's tax qualifications centered around being a Certified Tax & Business Advisor, which, as reported by ProPublica, is a dubious title that is nowhere close to the same as a professional accountant like a CPA, CIA, or CMA. In fact, Long's accounting and tax experience are minimal, which many questioned as he was vying to take on the role of head of the tax authority. Beyond his qualifications, the AP highlights his suspect activities related to promoting unusually aggressive uses of tax credits like the employee retention tax credit and tribal tax credits.
Despite some of these concerns, following this seventh-month process, the Senate confirmed Long by a vote of 53-44.
As discussed in a Forbes article, one of the positives of his nomination is Long's vision of modernizing and streamlining the taxing authority. Long specifically points to taking clues from the private sector and eliminating programs that he deems wasteful, like Direct File.
While Long was vague about what he meant by this modernization vision, FedScoop reports that individuals within the IRS believe that Long's vision of modernizing the IRS will include a clearer embrace and usage of AI and automation in the audit process. This anticipation comes as numerous IRS positions are being eliminated, as reported by Politico, leading to questions about the agency's future.
In a study forthcoming in Contemporary Accounting Research titled 'Tax audits and the policing of corporate taxes: Insights from tax executives,' the authors provide evidence of inefficiencies in the way extant IRS audits are being conducted as they pertain to corporations. This study is authored by Jeri Seidman (University of Virginia, McIntire School of Commerce), Roshan Sinha, and Bridget Stomberg (both of Indiana University, Kelley School of Business).
This study finds inefficiencies in the current tax audit process. Sinha notes the key takeaways from the study are as follows, 'First, financial statement audits are both so regular and so thorough that tax executives view tax audits as redundant. Thus, tax audits may have limited ability to deter tax noncompliance. Second, tax executives are not passive actors in the tax audit process; they take deliberate actions to shape audit outcomes. Third, tax audits are less efficient for everyone when taxpayers perceive them as procedurally unfair because they are less likely to accept the outcome.'
A key theme across the findings is the notion that the tax authority views its role in the process as a police officer. While it is one method of enforcement, the study finds that angle tends to put corporations on the defensive from the get-go, adversely affecting the relation between the IRS auditor and corporation and potentially negatively affecting the end outcome of the tax audit.
To conduct the analysis, the study performs 26 interviews with tax executives (directors and VPs of tax) at publicly traded U.S. companies. These interviews allowed executives to share detailed experiences and examples from their interactions with the IRS, state tax authorities, and international tax agencies. The interviews were semi-structured, which meant that although we had a list of questions we wanted to cover, there was flexibility to let the conversation flow to unscripted topics and ideas we had not anticipated.
Given the type of analysis, the responses led to several surprising findings. Seidman notes three, in particular, related to how the executives respond to the audit process. 'We were surprised by the extent to which tax executives share information with their peers, essentially comparing notes with competitors about specific tax agents and audit strategies. Even more striking was their perception that financial statement audits already impose such stringent oversight on their taxes that income tax audits become redundant.' Second, Seidman highlights that 'when tax executives perceive audits as unfair, they are less likely to accept the outcome. Instead, they may pursue costly appeals, which can drag on for years. Interestingly, these protracted battles often conclude with no additional taxes owed, highlighting inefficiencies in the current system where both taxpayers and tax authorities expend significant resources, yet generally end up with the same resolution anyway.'
Lastly, Seidman states, 'in addition to the negative comments directed at the IRS in terms of agent training or education and culture, interviewees also regularly comment on how far behind the IRS is technology-wise, especially compared to Europe and Australia.' This point emphasizes the need for the IRS to invest more in its physical infrastructure to remain on par with other developed nation's tax authorities.
The study concludes by suggesting that the tax authority can develop novel and more efficient ways to conduct their audits in the new era of budget limitations and financial statement disclosures. As for policymakers, Stomberg states that they can 'consider whether the current system, particularly the frequent 'game of attrition' between tax authorities and taxpayers over the course of long audits, represents an optimal use of resources. In particular, interviewees largely herald cooperative programs, though they had less positive things to say about CAP than about other country's programs.'
Given the mission Long depicted for a new modern IRS, this study provides several important takeaways that can be considered to achieve this modernization without sacrificing the taxing authority's grip on funding the federal government. For instance, if the financial statement audits are already adequately reviewing the tax financial statement disclosures, then perhaps the IRS can utilize that information already available to deter tax noncompliance. The IRS can even go as far as to work with auditing governing bodies like the PCAOB to develop standards that can provide greater oversight over publicly reported tax information. This notion carries even heavier weight with the impending change to financial accounting standards over corporate tax disclosures, which the FASB is implementing starting in 2025. Lastly, while it costs money to enhance the IRS's technology, it appears as though an investment in physical infrastructure may be warranted.
However, much of the possible improvements appear to stem from the tone and relation between the tax authority and tax executives. The study notes significant differences between the education, experience, and conduct of tax auditors, even among countries. For example, participants in the study applaud the HMRC from the U.K. on these dimensions in contrast with the U.S. auditors. These suggestions come at a critical time when the federal government wants to cut as much as 20% of IRS employees in 2026, according to The Journal of Accountancy. Despite these cuts, the IRS is currently rolling out improvements to auditing process, such as the recent adoption of an improved pre-filing program to aid certainty among corporate taxpayers. If the U.S. can continue to invest more in its auditors and technology, then a cost-effective way might emerge to efficiently achieve better tax audit outcomes.
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