Do the Math: Sequester Cuts to IRS Increase the Deficit

Let’s start with the facts. Every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200. Here’s another metric. Every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back.

Can you say “return on investment?”

Here’s another fact. The IRS’s budget has been reduced by 17 percent since 2002 (per capita and adjusted for inflation), and that includes this year’s sequester cuts. To adapt to the $594.5 million in budget cuts required by the sequester, the IRS has announced it will be forced to furlough each of its more than 89,000 employees for at least five days this year. While deficit reduction is supposed to be the goal of the sequester, cuts to the IRS will probably increase the deficit because it’s the IRS, after all, that collects tax revenue.  In fact, one expert estimated recently that furloughing 1,800 IRS “policeman” positions could cost the Treasury – that is, all of us – some $4.5 billion in lost revenue.

Denied adequate resources over the years, the IRS has not been able to keep up with its current workload, let alone expand its work. For example, a new report on IRS enforcement found that the agency actually audited 4.7 percent fewer returns in 2012 than it did in 2011. Considering that the IRS typically recovers about 14 percent of the $450 billion of unpaid taxes in a single year with its current resources, by increasing IRS resources we stand to reap billions in additional revenue from noncompliant taxpayers.

The Obama Administration proposed in its fiscal year 2014 budget to increase the IRS’s budget to $12.9 billion, about $1 billion more than its 2012 budget, with about $5.7 billion of that going to enforcement.  This increase doesn’t go nearly far enough considering the substantial decline in its budget during the past decade, but it’s a small investment we’d be smart to make.