The IRS is Shrinking?

The IRS is shrinking in budget and consequently in bandwidth. It cannot afford to enforce or audit the way it has in the past.

May 27, 2019

By: Bobby Casey, Managing Director GWP

The IRS is shrinking! For the small government folks out there, this is a dream come true! I’m still having a hard time believing it myself.

The obvious catch is that the IRS still exists. The obvious upside, however, is they don’t have the bandwidth to keep up with or enforce all the tax codes.

Between 2010 and 2017, the IRS has lost $2 BILLION in funding. Not lost like the Pentagon loses money, and can’t account for where it went. Lost, as in Congress cut their budget, so they had to reduce their employees, departments, and enforcement.

I don’t know if it was deliberate or not, but the cuts were gradual. Much like the erosion of our liberties, it happened slowly, over several years. If Congress cut $1 or $2 billion at once from the IRS budget, you can bet it would have received far more attention.

The IRS currently has just over 9,500 auditors. The last time it had less than 10,000 auditors was in the early 1950s! The number of audits have dropped over 40% in the past 8 years, with several audits never being completed because the agents are urged to move on to the next one.

According to ProPublica:

The result is a bureaucracy on life support and tens of billions in lost government revenue. ProPublica estimates a toll of at least $18 billion every year, but the true cost could easily run tens of billions of dollars higher.

The IRS has 10 years to get you with an audit. After that, your obligation expires. For instance, if you owed taxes from 2008, and there’s no audit, the IRS can’t come after you now and demand the money. Even if you actually should have paid it!

In 2010, the IRS was receiving approximately $14 billion in annual funding from Congress. That same year an estimated $480 MILLION in tax obligations lapsed (that is, the statute of limitations was up).

Fast-forward to 2017, when their budget dropped to $12 billion, and the amount of expired tax obligations skyrocketed to $8.3 BILLION! That’s 75% of their annual budget in lost revenue.

What is counter-intuitive is with the reduction of resources, the IRS focuses on the poor, not the rich. The logical assumption is that rich people have a larger whole number tax obligation, so with limited resources, go for those larger returns!

Not the case. The IRS is preoccupied with the poorest filers. Specifically those who are eligible for the Earned Income Tax Credit (EITC). Despite their dedication of resources and manpower, the EITC remains the third largest entitlement program, and is hemorrhaging revenues. Per Wikipedia:

The direct cost of the EITC to the U.S. federal government was about $56 billion in 2012. The IRS has estimated that between 21% and 25% of this cost ($11.6 to $13.6 billion) is due to EITC payments that were issued improperly to recipients who did not qualify for the EITC benefit that they received. For the 2013 tax year the IRS paid an estimated $13.6 billion in bogus claims. In total the IRS has overpaid as much as $132.6 billion in EITC over the last ten years.

The human resources now available at the IRS to track down offshore accounts is painfully insufficient. Offshore audits can take about 3 years to conduct, and internally the IRS is no longer concerned with how much money the agents are chasing, but how efficiently they can open and close a case. The ProPublica article goes on to say:

[T]he IRS was able to undertake fewer and fewer audits of offshore accounts. Given a list of American accounts in a tax haven, the IRS would often be able to audit only 10 to 15 percent of them.

Likewise, there’s been a precipitous drop in large corporate audits. Critics of the IRS budget cuts will say that large corporations are making out like bandits. But they aren’t. They are just profitable.

This agency has no choice but to cut corners. One such corner is pursuing those who don’t even bother to file a tax return! While employees commonly have taxes automatically garnished from their paychecks, businesses don’t. The IRS relies on them to voluntarily submit their returns. Those who haven’t, are difficult to track down.

When deciding whether to go after a business that has incorrectly submitted a return, or looking for a business who has failed to file a return, the former is much easier to pursue.

While this makes some assumptions about more recent years, these numbers can at least be considered directionally:

The last IRS report to assess what it calls the “tax gap,” issued in 2016, analyzed the period from 2008 to 2010. It found that taxpayers had paid about 82 percent of the taxes they truly owed. If the rate of compliance in 2017 was the same, that would translate to $667 billion in missing taxes.

Despite the uncaptured revenues, the mere hike in tax receipts under Trump has offered at least an illusion of success for the IRS. Per CNBC:

The cost of collecting money from taxpayers has fallen 29 percent since 2012.

One reason is simple math. A smaller budget means costs are down, and an expanding economy has helped to increase overall tax revenues. So the IRS has taken in more revenue while spending less.

This is the government basically collapsing on itself. Congress makes all these laws with tax implications and leaves the IRS under funded with antiquated resources to keep up with it.

You might recall a major tax-day systems crash last year. The IRS was warned for years leading up to that to update it’s 60 year old system. It has twenty million lines of code dating back to 1960!

The Affordable Care Act put a strain on the already stretched IRS as did the increase in tax receipts during the Trump administration.

The most delicious part of all this is the IRS has NO friends in congress. None.

Say what you will about Republicans, but they have done a marvelous job of smearing the reputation of the IRS and hacking away at their budget. While Democrats would never initiate something like that, they are too cowardly to defend the agency in light of the scandals uncovered (and maybe exaggerated) by the Republicans.

The Republicans have also been the party that has urged (at least rhetorically) people toward a more simplified tax code such as a Flat Tax or Fair Tax. Instead, establishment politicians clutch to the existing 75,000 page tax code like granny pearls.

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