The Consequences of Woefully Underfunding the IRS

Following up on their efforts to enact dramatic cuts to the IRS’s funding last year, Republican members of the House Appropriations Subcommittee on Financial Services voted to slash IRS funding by $341 million, pushing the agency’s budget to its lowest level in more than five years. What makes these proposed spending cuts so ridiculous is that every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200 and every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back.

From fiscal year 2010 to 2014, the IRS has seen its overall funding cut by as much as 14 percent (adjusting for inflation) and its staff cut by 11 percent. Making matters worse, these cuts come even as the IRS takes on increasing numbers of tax returns and the substantial new responsibilities of enforcing the Foreign Account Tax Compliance Act (FATCA) and the tax subsidies in the Affordable Care Act (ACA).

Because the IRS’s job is to collect taxes that pay for the rest of the government, it is unique in that cuts to its budget have the effect of substantially increasing the deficit. In fact, the Treasury Inspector General for Tax Administration (TIGTA) found that the 14 percent reduction in enforcement personnel from fiscal year (FY) 2010 to 2012 forced by budget cuts resulted in a loss of $7.6 billion in revenue in FY 2012 alone.

A new must-read report by the Center on Budget and Policy Priorities (CBPP) catalogues the variety of ways that this decrease in funding has hamstrung the agency’s ability to do its basic duties. For example, the CBPP notes that budget constraints have contributed to the delays of critical computer infrastructure created to combat identity theft and the filing of fraudulent tax returns. As it stands now, the new system has still not come into place, meaning that victims of identity theft have to wait longer than six months for a resolution to their case.

While the recent IRS scandal is driving many House Republicans to push deeper cuts to the agency, the scandal is really just further evidence that the IRS needs a larger budget to get its job done right. The latest blowup over the IRS’s failure to keep extensive email records, for instance, appears to be driven in part by the fact that the IRS could not afford the $10 million required to increase the capacity of the server where it stores emails. The non-partisan and well-respected National Taxpayer Advocate perfectly explained the fundamental problem with the IRS when she noted in a speech that while “the IRS can improve its policies and procedures,” the recent cuts to the agency are “just plain nuts.”

The Senate for its part has proposed increasing the agency’s budget by $236 million, which is $950 million lower than the increase the Obama administration requested. While this would be a significant step in the right direction, even the administration’s request would not even restore IRS funding to its 2010 level if you take inflation into account.