IRS Needs Adequate Funding to Explain, Enforce Complex Tax Code

Policy Memo
Monday, April 17, 2017

IRS Commissioner John Koskinen warned recently that funding constraints and staff reductions at his agency could result in fewer people paying their taxes and the government running higher budget deficits.

The full-time IRS workforce has shrunk by more than 17,000 since 2010, he said. Meanwhile, the agency’s workload has increased because more tax returns were filed and Congress made the tax system more difficult to explain and enforce.

“At well over 10,000 pages, our tax code is now the most complicated it’s ever been,” Koskinen said.

The partial budget plan that Trump released last month, however, called for cutting another $239 million in IRS funding in the coming fiscal year -- despite concerns that Treasury Secretary Steven Mnuchin had previously expressed about low IRS staffing and how it might reduce tax revenue.

Koskinen said in a speech this month that the IRS audited about a million people last year -- less than 1 percent of the individual returns filed and the lowest number of audits in more than a decade.

“For some people, that might sound like good news,” the commissioner said. “But a big part of the reason we do compliance activities is to make sure those folks who are trying to comply can be confident that the system is fair and everyone is paying their taxes. If I’m paying my fair share of taxes, but I see others who don’t and get away with it, I’ll be a lot less motivated to be tax-compliant in the future.”

A one-percent drop in the tax compliance rate would mean a loss of more than $30 billion in government revenue a year.

“Think about what a loss of $300 billion over ten years would mean to the federal deficit,” Koskinen said. “And if the notion takes hold that the tax system is unfair, reversing that notion -- and that decline in the compliance rate -- won’t be easy to do.”

In 2016 the IRS estimated that $458 billion went unpaid in 2008 through 2010, a figure known as the “tax gap.” IRS enforcement efforts and late payments later brought in $52 billion, which reduced the net tax gap for that period to $406 billion.

The tax gap is likely higher now as the result of economic growth in recent years as well as reduced enforcement efforts.

In February the Government Accountability Office (GAO) cited the size of the tax gap in explaining why tax enforcement efforts were included in its “High Risk List” of federal programs that are vulnerable to fraud, abuse and other problems.

While giving the IRS credit for efforts to reduce the tax gap, the GAO added that the Internal Revenue Service’s enforcement efforts and other important work remain “a challenge” because of “an uncertain budgetary environment.”

During his Senate confirmation hearing in January, Mnuchin said he was “particularly surprised” to learn that the IRS headcount “has gone down quite dramatically, almost 30 percent over the last number of years.”

He added: "I don't think there's any other government agency that has gone down 30 percent, and especially for an agency that collects revenues, this is something that I'm concerned about." A number of lawmakers have expressed similar concerns.

Nina E. Olson, the national taxpayer advocate, has also repeatedly questioned IRS funding levels. In her latest annual report to Congress, Olson said she was particularly worried that budget pressures could lead the IRS to “substantially reduce telephone and face-to-face interaction with taxpayers,” forcing them to depend more heavily on costly private assistance.

As administration officials and members of Congress search for ways to pay for new programs and reduce the trillions of dollars in projected deficits over the next decade, they should not ignore an obvious step: Ensuring that the IRS has sufficient resources to help confused taxpayers, collect overdue payments and pursue tax-dodgers.