Tech and the IRS Evolution with Chuck Rettig

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Hey, hey, it's Jody Padar here, the radical cpa, and I want to welcome you to a special edition of Radical Ideas. And I'm really excited because anyone who knows me knows my passions about technology and taxes. So when given the opportunity to interview the former IRS commissioner, Charles Chuck Redding on these topics, I absolutely jumped at the opportunity. And I'll try to maintain my best fangirl excitement because, you know, this is a really special opportunity for me. But I hope you'll listen as I talk about the future of technology, paperless processing talent, and much, much more as we dig deep into technology and taxes. So, Chuck, welcome to the show. Thank you for being here. Really excited you're here today. And before we get started, my audience today really knows you in your prior life, right, as a. As a former IRS commissioner, but you now have moved into the private sector. So can you share what you're doing today and why you decided that it's so important to get involved in this part?

Yeah, you know, as you know, Jody, I was a tax guy on the outside for 36 years, and then my second career change was going to the IRS and being commissioner of the Internal Revenue Service. So I've seen both sides of the fence, if you will. My wife's a tax accountant, does tax preparation. I know thousands of people who prepare returns, et cetera, et cetera, work in the tax field generically. And K1X came on the radar screen as far as being on their board of directors with the idea of what they're doing. I was not familiar with it before I got involved, became very familiar with it, obviously. And when you can really do, when you can streamline a process that I think many in the accounting field would look at as somewhat mundane, taking a PDF information, typing it into a computer and putting it there. I think we all know people in the accounting field who started out their career that way, and people have been around for 36 years, think, well, everybody should start out their career that way. And they kind of ignore. The world has changed, the volumes have changed, the world has changed. Technology. And so you have technology with K1X, but also there's, you know, various forms that we're looking at in addition to the K1s, but you have technology that can streamline that process, which, when you have a shortage of accountants, is huge. One, let the people do what they went to school to do. Right. Or their training is to do, give them career opportunities, rather than a year or two or whatever or a big part of tax season to sort of put the K1 information into a computer, you also lose the error rate for streamlined processes. Technology, as you well know, goes down significantly when you use AI and you can actually process something. And then your review time is also reduced significantly. So if I bang in the information from a K1, you or somebody else in the firm is going to have to review that information and someone else then is going to take it, and the error rate is there. K1X provides the ability to streamline that, freeing up the human resources that you have inside, reducing errors, significantly, identifying K1s that don't have information that match up. All I can say is I saw it in process 90K1s processed in a matter of seconds. And then a string of green check marks, but with two red check marks, which would be. Jody, these are the ones you need to check. Yeah. And so you see that. And then now flip to the other side. Being at the IRS, IRS had the same problems. Most K1 data is trapped in a PDF, which is a paper form it comes in. And so the IRS had the same issues with respect to processing the information that it got. When you streamline that and you digitize it, you, you significantly reduce the error rate that's there. By reducing the error rate, you allow electronically filed documents to process through the system in light speed. Really, I mean, you saw, you know, so that, bottom line, it helps the resources in the tax community, it helps the resources in the irs, it reduces errors, and people are entitled to refunds. It gets the refunds faster. I mean, it's a win, win, win.

Yeah. I think automation is so critical, right? But I mean, in reality, look at where the IRS is today, right? Like a lot of their software and their things haven't changed in 30 years. Right? So when we talk about something like K1X and we talk about adding these new technologies to, to the irs, you know, do you think that the IRS is going to be able to kind of respond in the right way to accept these new technologies and for them to kind of evolve with them as the technologies evolve? Because I think the hard part is, is the IRS is still working on systems that are very old. And today's AI and new technologies are so new. And now we're trying to connect the two. And I mean, I don't have to tell you about all the, the hard things that happen at the IRS with just the, the funding and how they, how slow they are to move and all that stuff. Do you think it's actually realistic that as we live in this new world of technology, that the new, the, the new technology and the old technology of the IRS are actually going to be able to come together to make a difference for tax professionals and tax payers as a whole. And I would say as a positive on the IRS too.

I think it'll work. I think it'll happen. We created a digitization office for IRS in 2021, loosely referred to as Team Digi. A tremendous amount of contractor effort on the outside. Right. You know, I went up to Silicon Valley, I went to Austin, Texas, did the pitches to the fintech firms of you need to help us. Same reason I came on onboard irs make it better. You guys have this technology and what we can't have happen is have the agency go 10 or 15 or 20 years and build out systems that aren't compatible with what fintech has on its schedule for them. So IRIS needed to catch up. And you alluded to the obvious, which is in August of 2022. One of the major things that happened during the term that I was there was IRS initially got, you know, $80 billion of funding, you know, spread out over 10 years. But I will tell you, we, every time I testified, we look for timely, consistent, multi year funding. And it's all on the terminology IRS uses is modernization. So the ability to do that is critical inside the workforce has the abilities. People are definitely coming on board in that area. Technology people like a challenge, and IRS provides that challenge. So do I think it's going to happen by fiscal IRIS on a September year in fiscal 24 or fiscal 25? We have to watch the way the winds blow. It's difficult for the IRS to plan things out. Will it be better? Absolutely. But that's a lawyer term, right? How much better, Chuck, will it be? Jody's asking. No, there's better and there's better. You're gonna make a difference for the real people. And I think the answer to that is yes. I think it might be further than 2024 just because of a variety of things, including technology. The ability of technology to read a complex 1040, the ability of a human to read a complex 1040. Right. Is difficult. So should we believe that AI is gonna get it that much better? But we're definitely headed in the right direction.

Yeah. So one of the cool things about like some of the stuff I'm working on at April is like, I don't know if you realize this, but a personalized tax return has over 1.2 septillion possible ways to file a tax return. Which is crazy, right? Like when you think about all the different ways and all the different pathways. And that's just a 1040. That's not even. We didn't even talk about partnerships, s Corps, everything else. Right. And you think about all those different paths they can go down. Right. And that's where artificial intelligence should help us be able to kind of humanize that experience. I think, I think my audience's concerns, my concerns are like, we're at the kind of this bridge of technology and like this changing thing, and we want the IRS to change with us. And you with being a K1 too. K1X2 want that as well, because, like, it makes our lives so much easier as professionals. We can do what's important. We can actually like, as opposed to being so, like, buried in the detail, which half the time, again, you know, we talked earlier at the show about the mistakes that happen and when you can automate that stuff, you know, you, you have less opportunity for error. So I, I think that's kind of the general sentiment of like, kind of tax professionals and things like that is we want everything to kind of catch up. So. So do you think I started in.

Practice when you had a telephone and no computers. Right, right. Not even fax machines. And now, you know, I used to go out and talk, and I'd say I can. Why I'm talking to you here. I can go online and edit documents and send them to somebody in Europe. And I still consider myself, I'll say, relatively young. I think the acceleration over the next 10 years is going to far exceed us. Going from no computers, almost no Internet access, etc. I think that we're about ready for an explosion in the tax world, about ready for an explosion that will help people. And you and I have talked critical to get more people into the field. And so there's limited availability of human resources in this industry, so you have to be able to do that. And the error rate difference, we're ultimately on the private side. We're ultimately accountable to clients. The error rate difference for paper returns that the IRS has to push the information in, 25% of those fall out and don't get processes processed automatically. When it comes in digitally, it's like 4 to 6%. Just that change for your own client base to be able to get something processed and get that refund faster or get whatever, you know, it's critical.

Yeah, absolutely. And do you think that that like years ago, the IRS went to kind of the private sector for help? I, you know, you talked briefly about, you know, going to the Silicon Valley, do you think the IRS is really open to that moving forward to saying, look, we're going to need more help than just IRS employees to kind of figure out this new way of working together and, like, kind of solving these problems? Because I think they're bigger than just the IRS by themselves.

Yeah. Efile would not have happened without private sector engagement. A lot of the technology and security, you know, there's circa, which is a public private partnership with irs. Those are critical. And I will tell you, you know, obviously I'm biased because they come from the private sector, but the career IRS employees embrace that wholesale. They are. Look, that's not like, oh, we're gonna just do our thing and ignore you all. It's no, let's, you know, hold hands and get this better, because the better product is for everybody. Tax administration belongs to everybody. And I think in this, in the digital space, if you will, technology brings both sides together for that common, you know, approach to let's get this better.

Yeah. I mean, that, to me, that's exciting. That's like, you know, I've waited a long time for this as well. Like, and so nothing moves fast enough for me. But, like, I'm excited about, like, the future, and I'm excited about the funding, and I'm excited about all of these things that are starting, like, over my career, like, have started to really evolve. So. But we also know that, like, all these IRS employees, as well as accountants and, like, the boomers, they're all retiring now. Right. Like, so how are we going to kind of evolve that? And I think the concern, too, is, is how do we help get people wanting to work for the IRS and to be part of this kind of change when there's so many other sexier opportunities out there. Right? Like, there's so many other things out there that they could pick to do than just work for the government. And it's not necessarily the most sexiest job around.

That's an understatement. But, yeah, if you look back years ago, right. I started practice in 1980. Two years ago, it was a calling card in the private sector to say, hey, I used to work at, you know, the Internal Revenue Service, estate taxing agency, et cetera, et cetera. And, you know, from 2011 to 2018, there was no hiring at IRS. They had no recruitment office. They could replace one out of four employees who left. And all the data is there to support that. So we flipped. In 2018, we went back to, well, let's do what the private sector is doing. One, reach out to, if you will, business school, both bachelor and master's professors, and explain to them what we have and offer the same incentives, tuition reimbursement, child care for an aging workforce, elder care, quality of life. But more importantly in the technology field is, I think, sort of the unique challenges, right? You know, and the IT folks love a challenge. And I used to go out and say, nobody's going to provide you a bigger challenge in life than we will. Come on board. You know, some people come on board thinking they're going to be on there three or four years and they do a 35 years. Some come on board three or four years and they're like, well, gee, in the private sector, I had all these other, you know, perks, if you will, right? That federal government's not going to be able to provide you. And so IRS needs to find those people. That's one of the biggest hurdles coming forward. You read all the things about everything else. Technology at a core is driven by people. People know when to throttle up, throttle down, which technology to buy, which to implement, et cetera, et cetera. And so everybody has those same things. What IRS does provide is opportunities for career growth. Obviously, somebody can come on board and in 10 years, they'll be running some part of the IRS that's significant with, if they want it, potentially hundreds of people under them. It's hard to get that on the outside, right? That kind of experience. And then you leave the government and say, well, this is what I did there. So I never sugarcoated. And I don't think people should to say, don't worry, IRS be hire all the people at once. It won't. It's a struggle. And I think that people have to be realistic. I do believe that it's a great place to go to work. I think that the experience people get, the ability to work with some really exceptional people who are inside as well as contractors on the outside, it's hard to match. But, you know, people will choose, make that choice for themselves, right?

And I think too, it's going to help as like, you know, I just saw an announcement about this new paperless processing thing, right? Like that the IRS now wants to do more paperless processing with notices and other things so that it's not so hard. Because I think about, you know, just as a CPA dealing with the IRS and waiting for those responses to come back because they can't even. You can't even get them to them, right? And like we think about the fax technology, right? Like, you Know, the irs, I think, is the only one who still actually has a fax. I think everyone else is even using an email to fax, right? Like, you fax it email and then it works, right? So, like, do you think that that's kind of too. You know, we think about automation, that obviously automation should help reduce the need for people, right? Because, like, there'll be more work done by automated things. But also then when we're looking at highly skilled people who, like, have these data science degrees and all these other, I'll say, more technical roles, I think it's going to be a little bit of a challenge to kind of to get there. And I'll say marry it all together, right? Because I think you, you know, it's great we're doing paperless processing over here, but how do we now bring in all those people, too? Because you still have your legacy employees that you have to upskill them as well. Right? And so, yeah, that's kind of my thought around it is like, how do we marry all the things together?

Well, I think you hit it right on. Ultimately, the IRS employees need to know that they're valued and respected. And then they'll go in, they'll get that motivation. Everybody would, you know, on the outside, too, you hire a new person to come to your firm, then you need to spend some time with them and show that they matter. And it's no different in the government. And the people will embrace these changes. And private sector or the government is never going to have too many people, if you will, in the industry. If I have like 30 seconds, first six months on board. Secretary Mnuchin comes to IRS new Carrollton office, and he's talking about modernization. Modernization, modernization. IRS employee raised their hand and said, well, every time you say modernization, I think you're replacing us. And he looks up and he says, do you think in your lifetime or my lifetime we're ever going to have too many employees at the irs? It's not going to happen. And he flipped right away to what you said, which is, we're going to upskill the people that we have. We're going to train them for places that modernization allows us to leverage the resources we do have. And we're going to upskill these folks and put them in positions where they want to be, but they're not leaving. Right. And I think that both public and private should look at technology like that.

Absolutely, absolutely. So now let's talk about, like this, K1X and K1S and K3S. And as we think about like bringing them together. When we take all that automation and now we make them, I'll say, uniform and standardized. Right. Because we're kind of taking that unstructured data, we're making it structured, and we're providing an opportunity for alternative investments. What do you think about that as taking your IRS prior hat off, but thinking about it from the investment perspective and the opportunities for our economy and our markets to be able to actually compare K1s so that they actually kind of look alike as opposed to kind of where they are today, where they're kind of all over the place.

Place that's exactly at the core. You know, there's 10 different cores for this. Right. But you're hitting exactly on the core. If I want to compare a variety of entities, I should be looking at apples and apples and apples and apples that these entities lay on the table. Right. Compared to having everything being a different format, where I need somebody with, you know, 10 different types of degrees to tell me, oh, this one actually performs better, I should be able to see that. And so consistently having a consistent form and format that people can go to, I think will help individual choice of the alternative investments I might want, which are basically non publicly traded stocks. And then once you get out there, it's all over the board consistently be able to look at things. And then the other side, that of itself should help the capital markets. If I know where I think I'm investing because I heard somebody say something, well, that's not the way to invest. Right. You should, you should look at the numbers and see what the numbers make sense, both historical and forecast. This gives you the ability to sort of have all that in front of you in one form and I think will help the capital markets. It'll help the capital markets where they should be helped. And the ones that are sort of obfuscating the obvious, you know, purposely putting out information might be a little unclear. I don't think it will help them. Right. And I think that ultimately that's. That's good for, you know, for every American.

Yeah, that's what I think. And I think too, that's one of the places that like AI machine learning really can come in. Because if you think about the complexity of the tax code and even when you read those instructions, like the different interpretations of them and how do we get all of these things kind of so that as people are reading them, they actually kind of come to the same conclusion, so, versus, you know, kind of the discrepancy that may be out there today. So I To me, that's the, again, the exciting part of the new technologies that I don't believe most people understand, including most CPAs, people who have been involved in it. Unless you're really kind of in this tech world, you really don't understand what's going to. What the opportunities are as the machines read more of this data and can really kind of put it all together. Which to me, that, again, that's the exciting stuff. And when it affects your investments, I mean, that's a real difference and that really affects our economy and it helps us with so many other things. So to me, that's really exciting.

Yeah, I think it should change everything for the good. And you're no longer making a blind investment, Right. You're making a knowledgeable investment based on real information, real data that you can trust the data and the way it was put together.

Right.

I think it's huge.

So for anyone who's been listening, time flies when we're having fun, right?

I keep looking at the clock thinking, oh, my God, I'm sorry, I ramble on too much.

No, no. Like, this has been amazing and thank you for spending time with me today. But when we think about if people. I don't know if you're open to people getting in touch with you or not or kind of how that works, but if people want to find more about, Find out more about K1X or kind of like how you see, like, all this technology changing as we move forward into the future. How do they find you? How do they get in touch with you? You know, where are you today?

I live in Los Angeles. I'm back in Los Angeles, but I am, you know, heavy travel schedule, as you can imagine, around the country, doing a lot of different things or in spaces that I believe in, that I'm passionate about, which is really helping people, that's my driver right now. Can we help real people? Tax professionals, underserved communities? Things like that are high on my list. K1X obviously has an Internet site, right? K1X. And if you reach out through, if somebody needs me and you reach out through them, they'll get in touch with me for sure. But I'm based in Los Angeles and I can tell you that I'm enjoying every day, but I haven't had 10 minutes. Last day of my term was November 12, and I haven't had 10 minutes of free time since then. But, you know, it's coming, it's coming. And, you know, I think everybody should enjoy every day and, you know, work into that. You know, trying to do your best, do your best for, obviously, your clients and all that, but where you can help the people who don't really have a voice reach out and try to help them. And if you have some projects that, you know, me having some involvement in might help underserved communities, please get those in front of me. It's important. Also military and veteran causes. I think everybody knows I have a son who's a major in the army, and military is important to us.

Amazing. Well, thank you so much, Chuck, for being with us today. Thank you for this delightful interview and excited to see kind of where all these technologies take us and the IRS in the future.

Maybe we should come back in six months, nine months, and you could say, hey, big guy, you said this, this, this didn't really happen.

I'm totally open to it if you are.

Anything for you. Anything.

So I'm Jody Padar, the radical cpa. Thank you for listening. And we'll catch you next time on Radical Ideas. Bye. Bye.

Thank you.