Federal Tax Updates

Former IRS Commissioner Danny Werfel and longtime agency communications chief Terry Lemons join Roger and Annie for a candid Thanksgiving conversation about the mounting challenges facing the agency heading into the 2026 filing season. The discussion covers budget cuts, staffing reductions, the lingering ERC backlog, and why a hollowed-out compliance function puts both taxpayers and tax professionals at greater risk.

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Chapters
  • (00:00) - Welcome to Federal Tax Updates
  • (01:22) - Introducing Special Guests: Terry Lemons and Danny Werfel
  • (02:33) - Danny's Post-IRS Journey
  • (08:03) - Terry Lemons' Post-IRS Activities
  • (12:27) - Challenges Facing the IRS and Tax Professionals
  • (19:52) - The Importance of IRS Compliance and Modernization
  • (30:50) - Concerns About Workforce Sustainability
  • (31:56) - Employee Retention Credit Issues
  • (32:37) - Fraud and Government Response
  • (35:30) - Impact of Government Shutdown on IRS Programs
  • (36:53) - IRS Performance and Resource Allocation
  • (40:52) - Challenges in Tax Compliance and Enforcement
  • (46:17) - Preparing for the Upcoming Tax Season
  • (51:19) - College Football Predictions
  • (53:53) - Closing Remarks and Holiday Wishes

Connect with Terry Lemons
https://www.linkedin.com/in/terry-lemons-77b3641a9

Connect with Danny Werfel
https://www.linkedin.com/in/danny-werfel-89441594

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Connect with the Hosts on LinkedIn
Roger Harris - https://www.linkedin.com/in/rogerharrispbs/
Annie Schwab - https://www.linkedin.com/in/annie-schwab-852418261/

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The full transcript for this episode is available by clicking on the Transcript tab at the top of this page

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Creators and Guests

Host
Annie Schwab, CPA
Franchisee Operations Manager at Padgett Business Services
Host
Roger Harris, EA
President at Padgett Business Services
Guest
Danny Werfel
Former IRS Commissioner
Guest
Terry Lemons
Former Communications & Liaison Chief at Internal Revenue Service

What is Federal Tax Updates?

CPAs, Enrolled Agents, and Tax Preparers can keep up-to-date with the latest federal tax information while earning NASBA approved CPE credits and IRS approved CE credits by listening to the bi-weekly Federal Tax Updates podcast. The hosts Roger Harris and Annie Schwab have over 75 years of tax experience between them, which has been featured in various media outlets including Wall Street Journal, USA Today, The Morning Business Report, Bloomberg Business News, and Accounting Today.

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

Roger Harris: Hello everyone. It's another federal tax update podcast. Annie and I are happy to join you today. We're recording this two days before Thanksgiving, so if I forget, happy Thanksgiving to everyone and, uh, hope you had a wonderful Thanksgiving because you probably couldn't hear it before Thanksgiving.

Annie Schwab: Thank you Roger, I'm excited to be here. Um, I am ready [00:00:30] for a little Thanksgiving break. Uh, got my stretchy pants ready. And, um, I'm looking forward to some good cooking that I'm not doing. So that's kind of my Thanksgiving plans over here. Over here in Texas.

Roger Harris: So favorite holiday. Plenty of food and plenty of football. So just just max out on both and then deal with it come Monday.

Annie Schwab: That's true. So thankfully luckily I guess I should say, um, we have two guests with us today. Um, both have been on with [00:01:00] us, but just not on together with us. Um, so it is our pleasure to welcome Terry Lemons and Danny Wuerffel, um, here on our podcast for the pre-thanksgiving kind of touch base, see how things are going in the world of of taxes and government shutdown and IRS news and all the above. So welcome the two of you. It's my pleasure to have you here with us today.

Danny Werfel: It's great to be on Happy Thanksgiving two days early.

Roger Harris: That's right. And it's great. [00:01:30] You know, it seems like I always saw these guys together, you know, when they were both in the service. So it felt like we'd had them on individually, that it made perfect sense to get them back on. Kind of get the get the band back together. Um, I know you guys have done some speaking since you both left the service, but we thought it would be a good idea for us to to reconnect you guys. So again, thanks you for thank you for for doing this again. And happy Thanksgiving to you guys. And so what have you been doing since, [00:02:00] uh, you left the service? Danny, let's start with you. What have I know? You've been busy because I've read about you and heard about a lot of the speaking games, but I think you've just AICPA. I saw something just the other day. So what's been keeping you busy?

Danny Werfel: Yeah, I have, um, a really interesting portfolio of of roles and assignments that I've taken on. I, you know, I think the headline is that coming out of the IRS in January and then immediately finding myself, [00:02:30] um, uh, in demand to answer questions about, um, the activities of the Trump administration, the activities of the Doge in speaking to all sorts of people from all walks of life, trying to answer questions about the IRS, uh, whether it was tax exempt or data sharing or the IRS cuts about, um, you know, what it means to declare that something is fraud or error. When, for example, the president announced [00:03:00] that, uh, that he had the authority to eliminate USAID without an act of Congress, if it's fraud, um, and, uh, and a lot of grantees, uh, wondering what their rights were given the disruption in their, uh, grant payments. Um, I just started talking to people and sharing what I know, both from my time at the IRS, but also my extensive, uh, part of my career from the Office of Management and Budget and my broader, just kind [00:03:30] of lifelong journey of studying as encyclopedic as I can, the government and how it operates. In talking to people, I realized, uh, that, uh, that America would benefit from a civics lesson. And, uh, and that's why I, I'm at both, um, Johns Hopkins University at their new school of government and policy that they're just standing up, and I'm there advising the dean and the faculty and hoping that, um, uh, [00:04:00] my contributions in the space of civics, uh, work its way into the, the curriculum and the activities.

Danny Werfel: And then I'm also, um, doing a fellowship at Duke University, which is centered specifically on civics. Uh, and there, um, we are looking to innovate ways in which to create a better conversation about government, especially amongst the youth. You know, you have, you know, middle school students and social studies [00:04:30] classes that are learning about government, you know, typically in a monotonous textbook about the three branches. All really important. Right? And we are trying to get creative to figure out, uh, today's youth, how would you communicate with them to get them a little bit more excited, interested and engaged on on what the government is and what it does in this country. So so that's my civics portfolio. Then I have a couple of private sector things. I'm on the board [00:05:00] of the Alliant Group, um, which is a company based out of Houston. And then I am also on the board of an AI startup called Clipbook, which does digital media, um, all kinds of stuff that I've never done before and just really enjoying the journey that I'm on.

Roger Harris: Well that's great. Yeah, I had a chance. Danny and I had a chance to catch up. He was his daughter. Goes to the University of Georgia. He was in town for a football game. And, uh, your passion for the civics was clear. And it sounds like you're following that, [00:05:30] that road. And that's great, because we talked about a lot of people, you know, if the post office doesn't work, but there's so much of government that is behind the scenes that you don't know, but you will know if it doesn't work. And so.

Danny Werfel: Yeah, when, when it's when when you're having an ordinary day. Um, there's a lot of of, of of work going on behind the scenes in the government that you have no visibility into.

Roger Harris: Right?

Danny Werfel: Keep that day ordinary. It's only when the day becomes extraordinary and then you actually [00:06:00] look for government.

Roger Harris: And want to.

Danny Werfel: Find whether it's someone gets sick in your house or there's a fire or there's some type of terrorist attack or something terrible happens. That is when the moment comes that everyone turns to government, right? So government is relevant both when your day is ordinary and um, typically if it's extraordinary, that's a problem. Uh, and it's, it's making sure people understand that when we take steps to downsize government, to cut its [00:06:30] budget, to, um, to, uh, you know, to, to, to essentially, uh, push people out of government and make it a less attractive career option for talented people, uh, in school right now or in the private sector. There's a cost to that. And my goal is just to make sure that we're we're smart buyers, uh, smart shoppers with respect to our big or small government or our government with extensive cuts, uh, or not. [00:07:00] And that's really my my, uh, my mission statement right now.

Roger Harris: Yeah. Well, and and it's something we all need to because we do our younger generation probably doesn't spend as much time. Maybe they aren't exposed as much to to learning as us old guys were when we went through school. And I mean old guys to lead into Terry. But Terry.

Terry Lemons: I knew that was coming.

Roger Harris: Uh, chief of communication labs at the IRS. Um, Terry, [00:07:30] I know you've been doing some interesting stuff. Tell us what you've been doing.

Terry Lemons: Yeah, well, let me just say it's hard to keep up with Danny. He's got quite a portfolio. Uh, but I've. I've been keeping really busy. Um, I would say there's really two tracks that I've been doing. One I've continued to be involved with tax issues, talking at a lot of tax conferences across the country, giving a behind the scenes look at what's going on inside IRS and government right now. And the other thing that I've been doing is [00:08:00] going back to my roots as a writer. I was a newspaper reporter before I joined the IRS back in the late 90s, and I've been able to do some writing. I had an article that ran in Forbes about the government shutdown and the other big project that I've had. You know, Roger, I know you know this, but I'm a big baseball fan. I grew up in Saint Louis, so I had a really fun deep dive. I wrote a book back during the summer and early fall on one of the old Saint Louis Cardinal teams. So [00:08:30] that was a tremendous amount of fun and a chance to stretch my writing legs and do something different. So watch for that coming out next summer.

Annie Schwab: That's exciting.

Roger Harris: Yeah.

Annie Schwab: I'm looking forward to that. So what else have you guys sort of have on your short horizon here? What are you thinking? Um, you know, I know you're going to get through the holidays, but, uh, what do you see in your short term future as as your goals going forward?

Danny Werfel: Well, I'd like [00:09:00] to continue to speak publicly to publish. I have I didn't mention I have a monthly column in, uh, in Bloomberg. Um, and where I'm trying, uh, to to plain language, uh, things that I see, uh, happening in, in the government space and the IRS space, but, but trying to, to broaden out, um, and provide a perspective that hopefully elevates the way in which we, uh, [00:09:30] talk about and engage on important topics. Not my goal is not to kind of come across Partizan, you know, kind of attacking the current administration on what they're doing. But It again, it's raising the awareness of what are some of the implications of of the executive branch taking action or not taking action? Um, and can we do that in a way that that creates good civil discourse? Um, so trying, you know, pushing that I'm speaking [00:10:00] publicly, uh, at a variety of different events, again, trying to provide perspective behind the scenes at the IRS or behind the scenes in government. Um, one common thread through my remarks is to, um, try to reset, uh, the discussion around the federal workforce as one, as a group of people that we should be appreciative of, that we should be investing in, um, that their [00:10:30] success is our success as a nation. Uh, and so, um, I make no apologies for, for my, uh, lifelong support for.

Roger Harris: Your passion of that. Yeah, yeah.

Danny Werfel: Support of the federal workforce. Um, having been connected to so many people in government, um, I, you know, that's that they inspire me, their expertise, their hard work. And again, uh, the idea here is to illuminate that hard work, not perfect. You know, there's no [00:11:00] there's no perfect, uh, organization in the world. Um, there's no perfect person in the world. I'm not perfect, was not a perfect commissioner, and the IRS was not perfect when, uh, in the two different stints I had as IRS commissioner. Um, but the but we but we made accomplishments. We had, you know, setbacks and triumphs. Um, I think that during both my terms, we took more steps forward than steps back. So we we had a net positive journey, which is what [00:11:30] is what we should expect from our government institutions because we can't expect perfection. Um, So on the horizon for me is to continue to use my platform as the former commissioner to, uh, to educate, not attack, but educate.

Roger Harris: Good. Well it's needed. And now that the books behind you. Because I know that was all encompassing.

Terry Lemons: So I think from my standpoint, Roger, it's a variation [00:12:00] of what Danny just talked about. Part of what I really want to do is, you know, look behind the scenes, there's a lot of mistaken stereotypes about the IRS and government. And I don't think the work of the agency is, you know, very well understood. Um, and as a corollary to that, I also, you know, want to help raise awareness about the important role that tax professionals [00:12:30] out there have, and especially with the upcoming filing season, I think the tax professionals are going to have to bear a lot of burden with all of these new tax law changes coming in. So from my standpoint, it's really kind of a variation of what Danny's been doing. But it's so important for people to understand what goes on behind the scenes. It just doesn't happen by accident at places like the IRS or, you know, for the tax professional community either. It's really, I think, underappreciated [00:13:00] role in our society. All the, you know, the network of people that make revenue collection in this agency work. Yeah, revenue collection in the country, I mean.

Danny Werfel: Right, I've been surprised, not surprised, but the IRS is in the news a lot. Yeah. Um, and, uh, and, you know, whether it's the ongoing, uh, court battle on the sharing of taxpayer data with Ice for immigration enforcement that's been in the news, right? The elimination of direct file [00:13:30] in the news. And then I think a kind of a, you know, kind of a less specific story, but a more general story about the impact of the government shutdown on all government activities. And for the IRS, it's right in the middle of their US readiness program to get ready for filing season in January. Um, having run the IRS in 2013, uh, when we when the government shut down for, uh, for almost a month, um, I saw as much as we tried to orchestrate [00:14:00] a shutdown plan that limited, limited the damage. There was disruption to our, uh, our filing readiness program, and we delayed filing season by a week. So I'm. You know, I'm also know that that once filing season starts, you know, the, you know, news will pop again about the IRS performance. And, and, um, there may be opportunities for me to speak about about different tips that can be provided. One [00:14:30] thing that I that I'm worried about, and I about. I worry about this all the time. Is tax scams. Filing season is when the bad actors, you know, do the most preying upon victims. You know, because people are in the mindset to file their taxes if they see a message from the IRS on their phone, which is fake, they're more likely to react to it because everyone knows it's filing season. Um, so to the extent that I can be a part of the community, [00:15:00] I'm no longer at the IRS, but I still feel like I'm a member of the tax community. Now, if I can speak to, uh, to those type of consumer alerts, I'll plan to do that as well.

Annie Schwab: I think there's definitely a concern that this tax season may or may not kick off on time. And even if it does, it's going to be a struggle just to, you know, get the forms ready and get everything filed. And, you know, lack of employees, lack of processing. Uh, a lot of people, you know, want need [00:15:30] those refunds. Want those refunds. You know, as soon as possible. And so it'll be it'll be interesting. I don't recall 2013, but.

Danny Werfel: I've been clear about, um, about some of the concerns that I see to reduce staff, to reduce budget. You know, one, one storyline here that I think is important is, is with the end of the government shutdown, the IRS did not get its request in the president's 2020 budget. That [00:16:00] did have a request for more, I think, 800 something million dollars in additional funding to pay for phone assistors in the call center and in the budget that President Trump submitted. He the budget described concerns with levels of service in the phone. If they don't get that plus up, they didn't get it. Um, and so concerns there. Um, I'm so, so when you, when you take the staff reductions, the budget reductions, The, um, the [00:16:30] government shutdown, the disruption that that has, the lack of stable leadership until now, it looks like they they finally have someone in Frank Lucignano that's going to provide stable leadership. But that's a recent thing, right. Um, there's, you know, I, I would I would say that there's risks heading into filing season, um, that, uh, that we should be monitoring. I also and this is, you know, I'll keep singing this from the mountaintops.

Danny Werfel: I still think it's important that [00:17:00] we hold the IRS accountable for a plan of modernization. Um, there's only been kind of announcements of of pausing the previous modernization plan that we had, uh, up and running, which I thought was making really good progress to serve taxpayers. Um, we've just seen a pause to that plan, a repeal, a lot of a lot of the budget that was dedicated to the modernization with the staff cuts at the IRS, we've heard about broad, high level promises [00:17:30] of AI and robotics and a tech enabled platform that's going to make up for those staff reductions. But we haven't seen, like the meat on the bones of what that means in terms of what are the next wave of technology updates that are coming. What part of the IRS process is going to be automated tomorrow that isn't automated today? None of that has been laid out. And so every chance I get, I remind people that we should be asking the IRS to produce their [00:18:00] updated modernization plan.

Terry Lemons: Yeah, I agree with a lot of what Danny said there. The other complicating factor here is the Senate Appropriations Committee just this week has released their proposed budget for the IRS. And they're talking about a 4% cut there, including a cut in the IT and operations support area, which, you know, for a lot of people, you know, that's inside baseball. But I think this is going to add even [00:18:30] more stress onto the agency. The House proposed an even bigger cut. So I think you can't underestimate the ability of IRS employees to deliver. I mean, they do every year, but there are unique gravitational forces that are coming into play on the agency this year. And I think there's a lot of risk facing the agency as we go into filing season 2026.

Roger Harris: And people will see it, you [00:19:00] know, again, when they can't get their refund, they can't get their phone calls answered, whatever the case may be. Tax pros will see it when they're waiting for guidance on some of the new legislation. And particularly challenging is the retroactive nature of some of this stuff in the new bill that, you know, you're having to kind of scramble to figure out how does it how do we make this work when we didn't know it existed for half the year? That's going to be a challenge. And you both mentioned tax pros. And I think I'm going to say this from the outside looking in it's probably not a [00:19:30] popular thing. But the agency does have a critical role. And one of those roles that I think is important that nobody wants to talk about or fund is compliance, that, you know, somebody has to be making sure that everyone's doing what they're supposed to do, or pretty soon nobody will be doing what they're supposed to do. And if if the I'm afraid that that final layer of protection is going to become on the tax pros, because if the service doesn't have the funds to enforce, we're going to have [00:20:00] to be telling everybody what the rules are and saying, this is the way you've got to do it and puts a lot of pressure on us, um, as a community. And it's not the popular thing to do. And sadly, if they don't like what I tell them, they can go down the street and have somebody tell them something different that makes them happy. And yeah, that's just going to hurt the system. It's not going to make the system work because we see that, you know, here in small businesses, you know, you can be put at a competitive disadvantage in [00:20:30] your business because your competitor isn't following rules that you're being told you have to follow. And sooner or later, your business survival is going to outweigh what your tax pro tells you.

Danny Werfel: Yeah. I mean, look, there is a ton of, um, rhetoric today about, um, and in the first 11 months of this administration around, um, government waste. And, you know, I've, I've seen [00:21:00] comments from the administration from Doge, a lot of them I don't disagree with. Right. It's like there's the there's too much waste in our contracting process. There's, um, spending on activities that don't end up resulting in meaningful impacts on the public. Like all of that's true. And it's always been true. Right. And and we take on different methods and approaches. Some more incremental, some more break glass to try to to [00:21:30] try to deal with it. And we can debate, um, uh, those, uh, those approaches of Doge versus previous efforts to, to cut spending. But if you are serious about the fiscal stewardship of the US government, of protecting taxpayer dollars, of protecting the government's bottom line, then you can't just be about spending. You also have to be about receipts. And [00:22:00] I'm not suggesting, um, you know, raising taxes. What I'm suggesting is let's collect the taxes that are already owed.

Roger Harris: There's a lot on the books, right?

Danny Werfel: So we have a roughly $700 billion a year, 700 billion with a B In taxes that go uncollected. But if we're kind of all focused on that, you know, that one contract at the, you know, Department of Agriculture or Department of Commerce that should [00:22:30] never have been, um, put in because it was wasteful. Yes. Great. Cut that contract. But that contract is likely, um, you know, spit in the ocean compared to, um, what we're seeing. Uh, what what the potential risk is of of hollowing out, uh, the IRS compliance function as the IRS collects, you know, more than 96% of all the revenue, uh, in the US government. So this is a drum that that I've beaten, [00:23:00] that the former commissioners have beaten. It's like, if you're going to have an agenda of smart financial stewardship, cut waste, be more of an efficient government. You don't hollow out. Accounts receivable. The part that collects the taxes. Um. And right now, again, where we are is we have we don't have all the facts. Right. But what the facts we do have is that a lot of people have left a lot [00:23:30] of institutional knowledge has left, including subject matter expertise. We have we're understanding that some of that is going to be replaced by technology. And, uh, but we don't we don't we don't see the plan. And one of the big moving pieces that I'm disappointed by is, um, that I thought was very promising was the, uh, president's nomination of Don Korb to be the chief counsel. Don brings with [00:24:00] him a wealth of experience in in how to strategically set the IRS up for success, for compliance again, to collect the taxes that are owed and not anymore. And so, uh, the the withdrawal of Don's nomination also, you know, was a stomach punch for me and others who were excited about his nomination to come in and help strategically set up the IRS for success on the compliance function. Again, lots of IRS [00:24:30] news since we spoke.

Roger Harris: Yeah. Yes. No. And it's not going to end like you said. And and again, I talk about compliance in a way. And you know, nobody wants to be audited. Nobody wants to have all that. You know, I get all that. And I've always used the analogy of the state patrolman pulling over the cars. It's not the one person they pull over, it's the 10 or 15 they slow down that are the real effectiveness. And so we don't have to stop audit everybody. We have to audit enough. We have [00:25:00] to have enough programs to catch enough so that we all feel obligated to do it the right way. I mean, I'm, I'm older than everybody on this call, and I can remember when taxpayers used to be afraid to do things wrong because they were afraid they would get caught. They don't feel that way anymore.

Terry Lemons: I think this goes back to your earlier point, Roger. This is going to put a lot of pressure on on people who are trying to do the right thing, [00:25:30] whether you're a taxpayer, whether you're a small business or a tax professional. This atmosphere where compliance is being cut so much and there's real risk there of people just taking this attitude of, well, nobody else is, you know, following rules, why should I? Right. That's a unique challenge for the tax professionals out there who, you know, have ethics guidelines and things like that. Um, the other thing that I think is really important, you know, over, you know, the 25 years [00:26:00] I was in government, we always see the pendulum swing back and forth between compliance and service. And, you know, there's a risk for taxpayers out there who, you know, are going to cut too many corners because you don't know what in a couple of years is going to happen with the IRS. And we've seen in the past, compliance goes down and then it goes back up. So, you know, there's risk out there for taxpayers and they may not realize it. Yeah.

Roger Harris: They're not as [00:26:30] afraid of it as I don't know if that's the right word. But they don't fear it as much as maybe they. There's a healthy need for enough fear to make people think before they cheat, if that's the right word. I don't know what the right word is here, but.

Terry Lemons: Well, it's your highway patrol analogy.

Roger Harris: Yeah, yeah, yeah. It's again, it's not the car you pull over, it's the 10 or 15 that see, you pull them over and so they slow down. That's how you make it work.

Danny Werfel: I think that was the second, like Carrie Underwood lyric [00:27:00] reference we've had on the podcast. We had stretchy pants. Now before repeats, you know, I'm revealing myself as a country music fan, um, uh, in addition to all the other music that I love.

Roger Harris: Yeah. We're gonna have something with a baseball bat in a minute here.

Annie Schwab: Yeah.

Danny Werfel: Exactly.

Terry Lemons: Speaking of cheating.

Roger Harris: Yeah. Yeah. So how do we fix this? I mean, we just have to ride this out. You know, it's funny. I used to know a lot of people [00:27:30] at the service. You know, I know more people outside of the service that used to work in the service than I know still there. And to the point of all the, uh, brain drain and the experiences there. Not to say the people that are there aren't, uh, qualified and working hard, but there is some value to experience.

Danny Werfel: So there is I mean, I think that like, look, I think on a balanced scorecard, I'm, you know, it's possible, certainly [00:28:00] possible that through, um, these kind of more aggressive steps. You know, the the the approach taken by Doge and after Doge to like really kick in some doors to get some things done. Um, you could see, you know, a faster, uh, approach to, to solutions maybe. Right, for me. And I'm open to this idea that that there are some, uh, [00:28:30] big thinking technologists that the Trump administration has brought in, um, that are really kind of kicking the tires and evaluating the IRS tech architecture in a way that hasn't been done before. And I don't want to, like, cancel out the potential that this fresh thinking and aggressive approach can't, um, result in some net positive changes. But but the jury's still out, right? We don't we haven't seen the [00:29:00] the conclusions. Like in other words, we looked at the architecture and it is messy. Okay, understood. And the former plan was to incremental and not enough. Okay, I'm with you. And therefore, what we plan to do is right. It's like, okay, that's what that's what we're waiting on. And I remain hopeful that there's going this plan that I keep asking for.

Danny Werfel: I'm I'm going to look at it and say, this [00:29:30] is really good. I wish we would have thought of that earlier. Um, the the question is, is, is, are is it going to be a workforce there that sustains it? Some of these, you know, kind of technology experts that are there that, uh, that are new, that are looking at the IRS with fresh eyes that I've heard, interviewed publicly. They talk about, you know, and, you know, I only have a few months left, and then I'm going back to the private sector. Uh, and so that that worries me from the standpoint of, [00:30:00] you know, if you have a good plan and you're going to execute on it, it doesn't happen in weeks or months. It takes a while. So, um, one of the questions, open questions I have when I've seen some of these tech experts in Doge and beyond speak, and often I'm agreeing with some of their conclusions. Um, don't agree with their methods always, but agree with their conclusions. Um, there's always this theme of and, uh, and we'll be heading back to the public sector soon. I'm like, no.

Roger Harris: No, [00:30:30] somebody's gotta stay.

Danny Werfel: Somebody's gotta. If the idea is good, if you have the better diagnosis, stick around and and make it work for the taxpayer.

Roger Harris: And do we dare bring up employee retention credit or the amount.

Annie Schwab: We should because we haven't had a podcast where we haven't. So we should just stick with consistency. Um, and I, we still get questions. People are still waiting for their money. We do still get questions about, you know, can I you know, I know I can put [00:31:00] it in this year, but what if I don't want to? And can I still go back and statute of limitations. I mean, we do get those types of of questions still today. So we can certainly touch on it. Um, and if you have some good insight, any happy news? You know, hopefully we'll never have to deal with this again.

Danny Werfel: Um, I don't have any update. I just have this reflection just to share a little bit of an inside view of, of of my reaction to, uh, to Dodge and this new administration [00:31:30] was there was a point early on in the administration, uh, where, uh, Mr. Musk and others were commenting about the rampant fraud in the government and, you know, concluding that, you know, it just it just goes out and the government doesn't do anything to stop it. And I was thinking like, well, just a few months ago, we we instituted this IRC moratorium because of fraud. And we got criticized.

Roger Harris: Right.

Danny Werfel: From both sides of the aisle [00:32:00] for doing just what you say. We never do. It is an example of me as IRS commissioner breaking glass. I my leadership style was much more uh, and has been across my career incremental coalition building. You know, two steps forward in exchange for one step back progress. It's how I grew up learning how to manage bureaucracies. Um, versus kind of the chainsaw method. Uh, but every once in a while, you need to break glass and, [00:32:30] um, uh, and that's what I did with, uh, with, with Terry and others at the IRS making a decision to to pause the program because of the concerns we had, I believe, and I think Dave Leebrick has talked about, um, that that saved an inordinate amount of money. It was a great example of the government and industry working together. Treasury was tracking an unusual spike in outlays. Industry was especially [00:33:00] reputable preparers were telling us that they were seeing dangerous signs in the water of of of, uh, clients leaving their trusted, uh, advice for less trusted advice for more specious credits. Um, it was a moment where the where the IRS or government needs to take bold action in order to protect taxpayer resources, but it doesn't mean that it's easy. And it [00:33:30] it has negatives too, right? People are, you know, concerned what you know, it creates uncertainty. When is the pipeline going to be reopened? Will it ever be reopened. So it was not without a cost of of of complexity and some stress on taxpayers. But but there there are close calls in government. There are there are areas where you make a decision in order to what we say, protect the fisc which is inside government. Talk for protect [00:34:00] the government's bottom line. Protect the taxpayer dollars. Um, but it's not it's never win win win. It's it's there's always a win lose scenario.

Roger Harris: Yeah. Somebody that's doing things the right way loses.

Danny Werfel: Yes, exactly.

Annie Schwab: Often. Yeah.

Terry Lemons: I think from from my standpoint, this is one of the things that the government shut down, I think is really kind of helping clog the system further. You've got a couple programs. Irc is one of them. Shutdown did that program [00:34:30] no favors. And you know, from my standpoint as a former tax administrator, you know, this was a pandemic era program. And you've still got claims out there. Uh, you've got people appealing disallowances in the appeals process. And the appeals folks are backlogged. So for me, there's a certain element of the agency really needs to get this program behind them, because they have a ton of other things they need to be focused on. [00:35:00] And for me, during the shutdown, I mean, I just worried about, you know, you've still got IRC there. If you're a victim of identity theft, you've got nearly a two year wait to get your situation resolved by the IRS. And these are the kind of things, when you've got build up like that, it really distracts from a lot of other priorities the IRS has. So for me, I, I'd really like to see the agency figure out a way to be able [00:35:30] to move forward and, you know, be able to focus on what's happening right now, not stuff back in the pandemic.

Danny Werfel: Well, and you know what's interesting, Terry? Talk about more IRS news, I think important for for preparers and members of the tax community to really, um, pay attention to what Tigta is reporting Tigta will likely provide a window. Um. Uh, they already have into where the [00:36:00] IRS is in terms of performance. Um, one troubling data point. Uh, they released a report on September 30th. Uh, and in that, uh, report pointed to a part of the paper backlog dealing with complex cases, uh, going to reach 6 million by 2026. That is, that's that's COVID level. Yeah. Um, and so, uh, what what what Terry and I learned, uh, and [00:36:30] what I certainly learned post Covid was that with the right resources, with the right budget, you can knock out these paper backlogs relatively quickly. Not all of them, but a lot of them. And so what I hope is that, um, that these types of helpful Tig. Tig to reports will also generate interest in moving away from these budget cuts. Right. Because if you're continuing in order to deal with these backlogs, these are resource [00:37:00] issues. You're one of the things to mythbuster a bit about the IRS is it is fairly formulaic in terms of inputs and outputs. And what do I mean by that? Like if you could say, how do I get to a certain level of service in the phones? There's a formula of how many people you have trained and on the, on the floor of the phone contact center, and you can increase it and see a formulaic increase in level of service, or you could decrease it and [00:37:30] see a formula decrease.

Danny Werfel: Same with submission processing. The more people you have managing the paper, both at intake and in accounts management, the lower by percentages and you can model this out. The paper backlog will be the more people you have, the higher it will be. And the one variable, the one wild card here, uh, that could disrupt that model is tech, right? And so the old model of number of people as [00:38:00] input to IRS performance or time cycles, process cycles as the output could be disrupted by tech. I'm open to that. Um, we were trying to do it, but we're not at that. You know, we haven't achieved escape velocity at least while I was there, or I don't think they have yet to demonstrate that, that putting more people on the issue is how you correct negative operational [00:38:30] performance in in the IRS today. So if you are cutting staff, um, and then not creating budget to replace them Formulaically, we'll see what happens. You can predict reductions in the level of service on the phone. Reductions in level of service in the walk in centers increase paper backlog. That's just formula, right? And um, and the management intervention we use while I was [00:39:00] there was to add more people to the front lines to to make sure that we weren't kind of leaving taxpayers out in the cold, uh, literally at on lines in shuttered walk in centers or figuratively, uh, and if the idea is, well, that's old school thinking, adding more people, we're going to add more tech. I'll be the first to say, great.

Roger Harris: Great.

Danny Werfel: Let's do some new school thinking. But then you got to show, you know, show your, your homework, uh, and show your math in terms of where, where [00:39:30] this is all headed.

Roger Harris: Because you got to do something because all of these programs, because you can throw employee retention credit, you've got conservation easements that are becoming a big problem. You know, again, I keep coming back to compliance is the bad guys just can overwhelm the system right now and just you. There's no way you're going to catch anywhere near all of them so they win, you know, for the few that get caught. So you've either got to find more people, more technology, a combination of the two so that the system just can't [00:40:00] be overwhelmed by, uh, well-intended laws. I mean, IRC during a pandemic made perfect sense. Uh, I'm sure conservation easements makes perfect sense, but they're just being abused, and, uh, yeah, they're getting away with it.

Danny Werfel: There's two victims. When the bad actors act badly, one is the government's bottom line, right? Our tax gap grows and we're not collecting what is owed. And it has negative impacts on our debt or deficit. [00:40:30] The other is innocent people that get exploited in many cases. My, uh, my unpacking of the IRC, I saw a lot of small businesses, get duped by kind of fly by night promoters. Uh, and, uh, a better functioning IRS is one that is educating, protecting small businesses, doing outreach and programs to help delineate for these small businesses what's real and what's fake. [00:41:00] And if fake, you're going to end up with more headaches. You have, uh, the elderly, veterans, people in underserved communities that can't afford accountants. These are the most likely people to be exploited by bad actors that, again, some of them are looking to exploit the government's bottom line and just steal taxpayer dollars directly from the government. But many are stealing money from citizens and small businesses. And, uh, and so when I think about compliance, [00:41:30] I want people to understand the victim is not just an abstract government balance sheet. Uh, the victim is also a person or a small business who, because of the complexity of our tax system. I mean, it just doesn't add up, right? You have a really complex tax system that's super stressful. And if you reduce the capacity IRS to help taxpayers navigate, you create an opening for scam artists [00:42:00] and bad actors to come in and exploit, uh, individuals that that might not have the tax literacy, uh, and the information they need to avoid those scams. So it's not a virtuous cycle by any stretch. And underinvesting in the IRS capacity helps facilitate, uh, more badness out there. And that's why I'm a champion for a well resourced IRS.

Roger Harris: Yeah, I got to tell you one story, erk story, because it's one of the worst I've heard. And it'll make your point about the business being owner, [00:42:30] being trapped. Business owner had gotten his erk claim through a legitimate preparer, and then he got approached by a mil, and he had kept copies of the checks he got from the IRS or in the original claim. He told them he had already been paid. In fact, he sent them copies of the checks he had received, and they basically got him the same amount of money a second time.

Annie Schwab: Oh, wow.

Roger Harris: And so I got wind of it and I said, well, you got to send it [00:43:00] back. They're suing. And I said, don't pay their fee and send the money back. Well, he called the IRS and they couldn't tell him how to send it back. And the people who did the second claim are suing him. So now he's being sued by the person who did the second claim. He's sitting on the money. He doesn't know what to do with it. And his preparer doesn't know how to report it because it's already been dealt with.

Annie Schwab: What a nightmare.

Roger Harris: And this is us. And we're not talking [00:43:30] big dollars here. We're probably talking 30 40,000 compared to millions of other guy. But think about that small person sitting there and where they sit today. Uh, and they feel trapped on both sides.

Danny Werfel: Yeah.

Annie Schwab: Yeah.

Danny Werfel: And difficult to get the IRS on the phone, potentially. Especially if this is quote unquote, a complex cases, as, um, uh Tigta pointed out. So, look, even a well-resourced IRS, you have stories like this.

Roger Harris: Oh, you're going to have stories like that. I [00:44:00] know, I just I just thought.

Danny Werfel: To.

Roger Harris: Me.

Danny Werfel: This is all about trending towards a continuous improvement journey, right? We need we want less people who are on the phone for two hours and they get hung up on. We want less people that are, um, uh, victims of identity theft at the front end. And once they're victims are waiting way too long to get their, um, their issue resolved. You're not you're not going to get it down to zero or perfection. Oh, no. And you [00:44:30] want the trends to be to be positive. I think we need to be monitoring weather trends. Don't stay positive. I think the funds that we're able to deploy in the Inflation Reduction Act will have a lasting impact in terms of smoothing out some of the bumps that existed in IRS operations. Uh, when when I arrived as commissioner. But, um, but those, those challenges, those cracks in the foundation can, uh, can reform very quickly.

Roger Harris: So [00:45:00] in our last few minutes, what are warning signs we should all look for in the filing season to tell us if things are going good or bad? Other than the obvious, the refund doesn't get sent out.

Terry Lemons: I have a couple thoughts here. One, people shouldn't expect to see an early filing season start date announcement. I think we're probably going to see that in January like we have in previous years. And even if that date gets [00:45:30] pushed back a week or two. I don't think people should be alarmed. One of the things you don't want to do is open up the IRS systems. If you know there's a problem out there, of course.

Annie Schwab: Yeah.

Terry Lemons: So I think we're really entering a critical stretch here. There's more guidance that needs to come out. Um, you know, we saw some last week with the guidance on tips and overtime. Uh, you know, Treasury really is putting a lot of emphasis on [00:46:00] this. They want it to be as incredibly taxpayer friendly. Actually, you know.

Roger Harris: Oh, it's very friendly.

Terry Lemons: Yeah. Uh, including, you know, some questioning, maybe if they went too far. Yeah.

Roger Harris: Yeah. Yeah. For this year? Yeah.

Terry Lemons: Um, but, you know, the other thing that I think is going to be really important for tax professionals to watch for are those first couple weeks of the filing season. And the systems may be running well, but if there's a problem writing the specs, The specifications [00:46:30] for it. You'll start seeing that stuff flare up late January early February. And the tax pros will be the early warning device on that, because I think the tax pros will probably, you know, see the shutter in the wings before a lot of people do. If there's a problem with some of these provisions.

Annie Schwab: Good point.

Roger Harris: Anything to add Danny? Do you think is there anything we need to.

Danny Werfel: Yeah, I think, I think sign one would be delay in filing season. Uh, [00:47:00] but that might help mitigate some of the other risks I'd be looking for. Are there more systems, uh, systems going to be down, you know, for maintenance? You know, um, any, you know, increase in the in the, in the outage performance. I think we have outages every filing season. But is the trend, uh, I think we need to monitor, um, the performance on paper. Uh, I think we need to see what's going on with identity theft in terms of whether that problem is widening [00:47:30] versus narrowing. And yeah, I mean, I mean, I think I would be surprised at this point, even with everything we've talked about, if like the core, like you file electronically, it doesn't get filtered for risk and it goes through, I, I would be surprised if refunds aren't issued in under 21 days, but that is something that would really depend on systems. The other thing, and this is really, really hard to measure, but one of the things that happens when you, um, are [00:48:00] not fully resourced is you make more mistakes. Um, and then and that creates problems, right? The more mistakes you make, the more people want to show up at your walk in centers, want to call in, want the website to do things it can't do. Um, and so it creates a bigger demand signal for people to get help from the IRS when you, the organization makes more mistakes. Um, and that I worry about that. It's a really hard thing to put a metric on. Yeah. Um, but it's something that, [00:48:30] as a tax professional, you should be on the lookout to see, you know, maybe some of your clients are going to be experiencing a little bit more quality control issues coming out of the IRS only because of, again, the formulaic nature. You know, it's loss of institutional knowledge. It's the tax system grows in size and complexity. And if the staff is getting smaller and the tech is not moving with pace, it just it's just math that the error variance [00:49:00] will go up.

Roger Harris: Yeah. It's going to happen.

Terry Lemons: Yeah. It's really easy to get sideways on it. And the other thing I think that's really important. You know, maybe if you have a return with no issues, you file electronically, it sails through the system. It's fine. But if you do have issues, you know, if you're a tax professional, you want to make sure your clients have got the good records in there. This is not going to be the year you want to do an amended return because of the bugs?

Roger Harris: Yeah.

Terry Lemons: Yeah. So, you know, it's more important than ever to get it right, I think. [00:49:30] Yeah.

Annie Schwab: Yeah. Well, we'll have to see what we can, uh, how we rate this tax season once we get going. Um.

Roger Harris: And I know the employees, but, yeah, the employees are going to do everything humanly possible with what they have. Um, and but they'll make mistakes, just like tax pros will taxpayers will. We're all going to make a mistake. And I think to me, I tell everybody the key word is patience. Just have a lot of patience.

Danny Werfel: Yep.

Terry Lemons: It's [00:50:00] great advice.

Roger Harris: Yeah. All right. The most important question, uh, who you got in the championship game of college football?

Danny Werfel: Well, last time I was on, I was in a different room, and I was like, oh, if only I was in a different room. I could pull out my my curvy for president, uh, budget I have right here.

Annie Schwab: Yes.

Danny Werfel: Not lying. Uh, and Kirby, I trust. Um, so I think the smart choice [00:50:30] is Georgia.

Roger Harris: All right, who are they going to play?

Danny Werfel: Uh, Indiana.

Roger Harris: Indiana.

Annie Schwab: Really?

Terry Lemons: I've got Ohio State. Ohio State versus whoever comes out of the SEC scrum. And I kind of like Georgia.

Roger Harris: All right. Annie.

Danny Werfel: I really like Gunner Stockton. I just think, like, he just reminds me of that college quarterback. I don't know if he's going to have a big NFL career at all. If he does go into the NFL. I think he's like a Taysom Hill [00:51:00] type on New Orleans. But, um, but I just love his grit. And I just think he's the type of college quarterback that you, you often win with, even if it's not with flash.

Roger Harris: And it's certainly somebody like pulling for I mean he's just you know, he's driving his old pickup truck and he got cows for Christmas. You know great.

Danny Werfel: A great quarterback name, right?

Annie Schwab: Yeah.

Danny Werfel: You go watch a movie about college football, and of course, they're calling the quarterback Gunner Stockton. [00:51:30] I couldn't come up with a better name than that.

Annie Schwab: That's true. No, I'm going to have to say Georgia. I mean, I want to pull for LSU Tigers, but they're not looking too good these days. So I'm going to stay with Georgia.

Roger Harris: Well, you know, I gotta have Georgia in it. You know, like I gotta have them there. And I think they'll probably end up paying us. I'm going to say Notre Dame somehow gets a favorable draw and we get revenge from knocking us out last year.

Danny Werfel: Wow. That is a that is a [00:52:00] high.

Roger Harris: That would.

Danny Werfel: Make anyone is going to. I think you can get good odds for that on on your local sports betting website. Yeah Georgia for sure.

Roger Harris: I'm always looking for the profitable payout too. Yeah.

Danny Werfel: Just just don't forget if they if you win more than $600, that's an income event that you have to.

Roger Harris: Yeah. Now, if I lose, I can only write off 90% of it. I can't even write it all off. So I just want revenge from last year when we had to play him because Gunnar wasn't ready last year. He'll [00:52:30] be ready this year. Yeah.

Danny Werfel: Oh, yeah, he will be, yeah.

Roger Harris: To play Notre Dame. So, uh.

Danny Werfel: All right, you all have a great holiday.

Annie Schwab: You too.

Roger Harris: Thank you guys. I can't tell you how much we appreciate this.

Danny Werfel: Our pleasure Terry. Always good to see you.

Terry Lemons: Thanks for having us. And great to see you guys.

Roger Harris: Happy Thanksgiving. And you guys, um, we gotta get together sometime. Danny. You gotta come back to another football game. Terry, you've been trying to come down to a game, so maybe you can come down for the. We'll have a little celebration [00:53:00] for the national championship at the stadium. You can.

Danny Werfel: Oh, that sounds great. Yeah. I don't know. For graduation this spring for sure.

Roger Harris: That's right. You got a graduation to come down for?

Danny Werfel: Yeah.

Terry Lemons: No. Maybe. Maybe, uh, meeting at the national championship might be appropriate, given the predictions here.

Roger Harris: Yeah. Where is it? Florida. Miami. Is it in Miami this year? I don't know, I think it's in Miami. Not a bad place to go.

Danny Werfel: And no, not at all.

Roger Harris: In January to go to South Florida. Okay. All right. We'll have to keep that. I can get the tickets. In [00:53:30] fact, I've already ordered them. We had to order football. We had to order championship tickets last week. So, uh, our name is in the, uh, in the kitty for tickets, so fingers crossed. Yeah.

Annie Schwab: Yes.

Roger Harris: All right.

Annie Schwab: Thank you. Roger, this is great.

Roger Harris: Any take us home. Thanks, guys.

Annie Schwab: I was going to say is, I hope everyone listening has a fantastic and healthy Thanksgiving holiday. And we will be back before the end of the year with another federal tax updates podcast. [00:54:00] So stay tuned. Thank you.