The IRS' leaders can transform the agency, if they have the right tools.

The IRS' leaders can transform the agency, if they have the right tools. Kent Nishimura / Los Angeles Times via Getty Images

The IRS Will Need These 4 Things to Succeed After the Midterms

Commissioner-designate Danny Werfel has an opportunity to transform the tax agency, if given the right tools.

I was relieved and gratified to see that President Biden has officially nominated my colleague Danny Werfel to become the next Internal Revenue Service commissioner. Even though Werfel has been the acting IRS leader before, the various challenges facing him now—should he be confirmed—are daunting and the political fallout of the midterm elections may serve to further compound that difficulty.

Still, I believe Werfel’s confirmation would offer an opportunity for him to demonstrate to reasonable, centrist legislators in both parties and chambers of Congress—those who will acknowledge that the country needs a viable tax collection agency—that he can transform the IRS without becoming partisan about it. That starts with sustaining the funding provided by the Inflation Reduction Act. However, it takes more than money: the IRS needs four other things right now if the hope of overcoming challenges is ever to become a reality.

Help Building a New Leadership Team

In my view, Commissioner-designate Werfel’s first priority should be to put together an executive leadership team composed of change agents from both inside and outside the agency. This is a page right out of the transformation book, and it’s a book that former IRS Commissioner Charles Rossotti helped write when we were at IRS. It is also exactly the role Congress had in mind when they made the commissioner’s position a five-year term appointment.

But it’s also going to take help from the Office of Personnel Management. If Werfel is to be successful in attracting private sector talent to fill technical and leadership positions, he’ll need authority to offer them higher salaries, just like some federal agencies can do now. That’s why Congress gave IRS streamlined critical pay authority back in 1998, and it was the impetus for an abortive effort to do so again in the Inflation Reduction Act (an effort I’ll confess to helping). It’s also why the Defense and Veterans Affairs departments, the National Institutes of Health, financial oversight agencies like the Securities and Exchange Commission, and others have all sought and received independent authority to pay more than Executive Level II (the current executive salary cap) for critical leadership and technical positions.

So, the IRS must now rely on OPM for help. The good news? Congress gave OPM authority to approve higher salaries for some 800 “critical pay” positions since 1990, potentially paying up to the level of the vice president’s salary for talent. The bad news is that OPM officials have approved only a handful of those positions, and they’ve done so on a case-by-case basis. That just isn’t going to work, and I would implore OPM to provide that authority on a broad, “trust but verify” basis. In other words, give IRS delegated critical pay authority for some specified number of positions—the Inflation Reduction Act would have authorized as many as 500—with whatever reasonable standards and procedural strings OPM wants to impose to avoid abuse, but then turn IRS loose to recruit and hire to that number.

Give the IRS’ Union a Seat at the Table

In addition to a new leadership team, there’s the need for a close, working partnership with the organization that represents IRS employees (among thousands of other federal civil servants)—the National Treasury Employees Union. I believe that NTEU needs to be intimately involved in this effort from its very beginning, helping IRS exercise the entire panoply of its personnel flexibilities—including those I’ve recommended here—as a full partner, with shared responsibility for its success.

Indeed, I would put NTEU on the agency’s executive leadership team, just as they were back in 1998. And this isn’t just a “let’s make nice for the cameras” expediency. Their active participation can bring huge credibility, not to mention great ideas and insights, from helping to design many of these new jobs—just as they did when the IRS’s Customer Service career field was first created—to identifying internal top notch “first consideration” candidates for retraining, reassignment or reemployment. The good news is that relatively speaking, IRS and NTEU have a model relationship (they’ve even won awards for it), so this isn’t a big step. But NTEU needs to be at the table, period.

Give IRS More Personnel Flexibilities

In addition to technical experts and senior leaders, the IRS will need thousands of front-line employees, but under today’s civil service system, getting them recruited, evaluated and hired is not easy. However, here again, OPM already has the authority to help IRS close the tax gap by giving it two additional personnel flexibilities, if it can just overcome its historic aversion to risk.

One of those is the ability to make expedited—potentially even on-the-spot—hires. In other words, direct hire authority. The good news is that according to my trusted sources, OPM and IRS are actively working on giving the agency direct hire authority, based solely on the critical need for such authority under the law. Note that Congress already gave IRS similar authority directly in its fiscal 2022 appropriations act, albeit on a narrow, time-limited basis. While the agency demonstrated its ability to exercise that authority effectively, that was a short-term Band-Aid, something we tried (and failed) to expand in the Inflation Reduction Act. But hopefully, OPM will soon give IRS broader direct hire authority, and it couldn’t come fast enough.

However, in addition to direct hire authority and expedited, “trust but verify” critical pay authority, OPM should also give the agency a blanket waiver to the annuity offset that re-employed IRS (and other federal) retirees would have to suffer if they’re hired back as agency employees. At present, the law requires them to give up all or part of their pensions—in an amount equal to their new government salary, no less—for the “privilege” of returning to IRS, and their refusal to do so is understandable. But the net result is that they often go to work for contractors, who then “rent” their services back to the government, often at a much higher hourly rate.

Note that while the IRS could offer its employees phased retirement (which was authorized by Congress in 2014 and comes with a limited annuity offset waiver), it has OPM oversight and so many strings attached that it’s rarely been used by agencies. Instead, like critical pay authority, a number of agencies—most notably the Defense Department, the FBI and the CIA—have gone to Congress to get their own independent “dual comp waiver” authority. OPM can grant that waiver authority today if an agency can demonstrate “unusual circumstances” (IRS even has a regulation permitting this, but with all kinds of restrictions). Bottom line: This is another fix that could be granted now, with whatever reasonable standards and audits OPM wants to impose. But this would go far toward solving the IRS’s impending staffing shortage, ironically brought on by its large-and-growing retirement-eligible workforce.

Give IRS Top Cover and Reasonable Oversight

In my view, the personnel flexibilities described above are essential to IRS’s success. But to obtain them, along with the funding that will fuel them, IRS could also use unequivocal top cover from the Biden administration, perhaps via a presidential memorandum that tells OPM, the Office of Management and Budget, and the General Services Administration to push the edge of the legal envelope when it comes to granting IRS the flexibilities many of us have outlined. And by shifting the burden of that push to the White House, such a memorandum could also alleviate any risk-aversion OPM and its peer-agencies may have.

These risks can also be mitigated by strong execution oversight from the White House, or better yet, the Treasury Department. Treasury played such an intermediary role in the IRS’s 1998 transformation, and perhaps supplemented by a reinvigorated IRS Oversight Board, it can serve as an honest broker here too, providing balanced oversight and post hoc audits to ensure that IRS is using administrative flexibilities responsibly, with the threat of rescinding those authorities if it doesn’t. And of course, Congress can and should provide its traditional oversight as well, hopefully led by those thoughtful lawmakers in both political parties who recognize the need for a fully funded, service-oriented IRS.

To me, these four things are all necessary if the IRS is to realize the promise of the Inflation Reduction Act. But while they are all necessary, they are not sufficient. The IRS—its leaders and managers, its union and the employees it represents, and those in the administration and on Capitol Hill who care—all need to step up to challenge. Knowing them as I do, I’m confident that they can. We just need to give them the right tools.

Ron Sanders is the former director of the University of South Florida’s School of Public Affairs and later, its Florida Center for Cybersecurity. He is also a 2006 Fellow of the National Academy of Public Administration. He was IRS’s first chief human resources officer, before becoming associate director of OPM, chief human capital officer for the U.S. Intelligence Community, and later, chair of the Federal Salary Council.