Cutting the IRS Budget is a Lose-Lose for American Taxpayers

The decision to further cut the Internal Revenue Service’s (IRS) budget by $346 million next year from its already low 2014 level is almost certainly the most ill-advised cut in the announced omnibus spending bill passed in the House of Representatives Thursday night and now moving forward in the Senate.

IRS budget cuts actually increase the budget deficit because they result in lower revenue collections. In fact, one study found that every dollar spent on the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200 and another report found that every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners $10 back.

The latest cut to the IRS comes on top of years of devastating budget cuts, with the agency’s budget already chopped by 14 percent between 2010 and 2014 (controlling for inflation). As a result, the IRS has cut its staff by 11 percent since 2010. These budget cuts have been enacted even as the IRS has to process more and more taxpayer information each year and to administer the distribution of billions in new tax credits as part of healthcare reform.

Given its increasing responsibilities and decreasing budget, it’s no wonder the National Taxpayer Advocate (NTA), a well-respected non-partisan IRS watchdog, said in its latest annual report that the IRS budget is one of the agency’s “most serious problems” and that the “IRS desperately needs more funding.” One area where the effects of the budget cuts are especially visible, according to the NTA, is in the customer service division, where only 61 percent of taxpayers seeking to speak with a customer service representative were able to get through.

The tragic thing about these budget cuts is that they have become politically self-reinforcing. For years, anti-tax conservatives have been happy to jump on any IRS misstep to justify punishing the agency with more budget cuts, which then makes the agency less able to function and more prone to precisely these same missteps.

Demonstrating this principle, many conservatives are using a new Treasury inspector general report showing that the IRS improperly paid out billions in child and earned income tax credits as a convenient prop to bash the IRS for “gross mismanagement” and “bureaucratic incompetence.” One point that these critics leave out is that this same report concludes that the IRS simply “does not have the resources nor does it have alternative compliance tools needed to adequately address the erroneous EITC payments identified.” In fact, Congress has failed to enact several Treasury and IRS proposals or provide funding that would enable the agency to reduce the error rate.

Taking these politically opportunistic attacks to their extreme, a recently released documentary  compared the IRS’s recent missteps to fascism and genocide in its advocacy for the IRS’s total abolition. The rhetoric of abolishing the IRS used to be the kind of irresponsible speech cordoned off to the political extremes. More recently, the Republican National Committee fundraised on the explicit promise that donating would help the party “Abolish the IRS,” though the committee never explained how it would go about paying for government without some equivalent agency to collect taxes. 

Besides the politicians, the only real beneficiaries of IRS cuts are the tax dodgers and cheats that will have even less reason to fear that they will be caught by the woefully inadequate tax enforcement. For example, the IRS commissioner recently noted (Subscription Required) that the agency simply does not have the capacity to take advantage of new international reporting requirements on multinational corporations to help with its corporate tax enforcement efforts. Failure of these enforcement efforts have left honest taxpayers holding the bag for an estimated $385 billion in unpaid taxes each year.

Rather than cutting the IRS’s budget, Congress should substantially increase its budget. A good start would be increasing its FY2015 budget by $1.5 billion, compared to the current proposed level in the budget deal, as President Obama proposed in his most recent budget. Such an increase would be a win-win for taxpayers since it would substantially decrease the deficit and at the same time improve the functioning of the IRS so that it can more fairly and effectively enforce the tax code.