The Internal Revenue Service needs to constantly adapt to provide the best possible service for taxpayers.
As a tax accountant with decades of experience navigating the complexities of the tax code to help small and mid-size businesses take advantage of the credits and deductions to which they’re entitled, I’m intimately familiar with how the IRS operates. There’s plenty the agency can do to improve the way it operates.
The good news is that improving the IRS isn’t nearly as complicated as politicians make it out to be. We don’t need to spend billions of dollars or make major changes to existing laws. We just need to make five simple changes to transform the IRS into an effective, efficient and – most importantly – fair entity capable of earning broad, bipartisan approval.
Reform #1: Create stronger penalties for fraud and abuse
Stronger penalties deter fraud in the first place, reducing the need for costly and time-consuming enforcement actions in the future while also making the credits more effective at achieving their intended purpose.
Congress often creates vast and complex tax credit programs that are vulnerable to fraud and abuse, then demands that the IRS allocate significant taxpayer resources to rooting out and punishing that fraud and abuse. That’s exactly what we experienced with two flagship COVID-era policies: the Paycheck Protection Program and the Employee Retention Credit.
We need to be more proactive and less reactive, which means introducing much stiffer penalties for defrauding programs like these from the very beginning (albeit with leeway for the IRS to use discretion to avoid prosecuting innocent mistakes). Scaring off bad actors in advance by making the risks outweigh the rewards would save taxpayers billions of dollars, enhance the economic benefits of tax credits, and spare law-abiding citizens and businesses the hassle and expense of defending themselves against audits.
Reform #2: Require transparency in the audit process
Fairness breeds trust, and trust leads to voluntary compliance.
The IRS currently seeks to maximize its advantage, on the theory that it’s primarily dealing with tax cheats, but this leads to illegitimate victories that tarnish the agency’s reputation with the public.
It’s common knowledge that IRS audits are a living nightmare. You don’t know what evidence the IRS may or may not have, they don’t have to justify their decision to target you, and you have no idea how long the process will take — it could easily drag on for years, while your legal and accounting bills keep stacking up.
Our founders understood that governments tend toward tyranny if they’re not firmly restrained. The Fourth, Fifth, Sixth, Seventh and Eighth Amendments to the U.S. Constitution are all designed to preserve the rights of the accused and prevent the government from abusing its powers. The same mentality should apply to the IRS.
Reform #3: Require probable cause
The IRS is extremely vulnerable to politicization and has been misused in the past to harass and handicap opponents of the incumbent administration.
We know the IRS can be weaponized, which is why almost every administration is accused of doing so at some point. Oftentimes, there’s at least some validity to the accusations.
The solution is simple: Legally require the IRS to establish probable cause before initiating an audit or investigation. No more acting on hunches or suspicions. If it’s good enough for law enforcement, it’s good enough for the IRS.
We should also impose strict time limits on audits. This will reduce the risk of audits being used to harass political opponents, reduce enforcement costs, and motivate the IRS to prioritize the cases with the highest chance of success.
Reform #4: Introduce rigorous cost-benefit analysis
The whole point of the IRS is to bring money into the government, so the agency should be run more like a business.
The IRS doesn’t exist to make society more “fair.” It exists to collect taxes. We shouldn’t be needlessly auditing good people just because there are bad actors out there. Before approving any audit, the IRS should carefully consider how much money it expects to bring in, and how much it expects to spend. Sometimes, discretion is the better part of valor, even if that means letting a possible tax cheat get away so you can catch an even bigger cheat.
Reform #5: Use AI to do better, not just to do more
We can save countless man-hours of labor and improve the chances of going after actual criminals while reducing the chances of auditing the innocent.
Currently, the IRS is mainly using AI to identify wealthy taxpayers who may be good targets for audits. But there’s so much more they can do with this revolutionary technology.
In addition to using AI to identify potential tax cheats, the IRS could use it to make more pragmatic decisions across the board, including decisions about whom not to audit. If the IRS implements this technology consistently with the principles outlined above, AI has enormous potential to make the IRS much more effective, efficient and fair.
If the IRS implements these five simple, straightforward, and common-sense reforms, it will be able to provide better service to taxpayers, implement the tax code more effectively, and help small and medium-sized businesses — the engine of America’s economy — prosper and thrive.
Julio Gonzalez is the CEO and Founder of Engineered Tax Services, Inc.