President Obama Calls for More IRS Funding in 2012 Budget

2/23/2011

Following the freeze-but-invest theme of his fiscal year (FY) 2012 budget, President Obama is calling for the Internal Revenue Service (IRS) to receive a boost compared to the agency's FY 2010 budget. Increased investments in tax enforcement and information technology (IT) could help make the currently complex tax code fairer while streamlining bureaucracy. Additionally, these improvements would likely raise more revenue for the government and make the agency more user-friendly. The Republican-controlled House, however, will likely stand in the way of the budget request, putting the IRS's future funding in question and potentially jeopardizing these reforms.

Of the $13.3 billion requested for the IRS in the president's FY 2012 budget, roughly $6 billion would go toward enforcement activities, an increase of $463 million over FY 2010 levels. Of note, $936 million of the $6 billion enforcement request would come from moving IRS funds around internally, which could help to make the budget increase more palatable to a Congress that appears intent on cutting spending. As the budget request notes, the move could also decrease future deficits.

Hoping to better deter taxpayers inclined to evade their responsibilities while also vigorously pursuing those who do, the IRS's enforcement activities have received steady budget increases under the Obama administration. Economists and federal tax analysts generally agree that for every dollar invested in enforcement actions, the federal government nets three to four dollars in additional revenue.

The IRS estimates that the approximately $460 million in additional enforcement funds would net $1.3 billion per year, once the new employees hired to track down tax evaders settle in by 2014. The agency also estimates that investments in tax evasion enforcement could have an effect on deterrence and thus increase revenues beyond the direct impact; the agency conservatively estimates this revenue effect to be a factor of about three.

These increases in revenue would not only decrease the tax gap, which is the difference between what individuals and businesses owe the government and what they actually pay on a timely basis, but they would also help reduce the projected $1.6 trillion federal budget deficit. The last estimate of the average gross tax gap (which used 2001 numbers updated in 2007) was $345 billion, but some have recently placed the figure as high as $500 billion. Reducing the tax gap is important to improving the integrity of the tax system and ensuring fairness.

The FY 2012 budget request would also provide roughly $333 million for the Business Systems Modernization Program (BSMP). The IRS is using BSMP, which is a fund authorized by Congress, to update many of its IT capabilities. In fact, to purchase IT capital assets, the agency must submit a detailed plan to Capitol Hill providing cost estimates, timelines, and expectations. There is also a requirement for the Government Accountability Office (GAO) to review and approve the final product.

Most recently, the IRS revamped its Business Master File Case Creation Nonfiler Identification Process (BMF CCNIP). The long-winded acronym is simply a program that uses third-party information and IRS account data "to select potential business nonfiler cases for pursuit based on the likelihood of securing returns and revenue."

With the requested FY 2012 funds, the agency would like to expand and improve its core taxpayer account database, CADE 2, which allows taxpayers to pay their taxes online and expedites refunds to them. The IRS would also invest an additional $33 million, funded through moving $321 million internally to operations support, to improve the IRS.gov website. Despite failing the last time it attempted to revamp its website, the IRS argues that the project will succeed under BSMP, allowing taxpayers to more easily access important tax information and services online.

Strategic investments in tax enforcement and IT resources are not only important to decreasing the tax gap and improving taxpayer service, but to addressing the IRS's only two high-risk program areas. Recently, the GAO released its 2011 high-risk series report that lets Congress and the administration know which government operations require more scrutiny or resources. Importantly, "the enforcement of tax laws" and "IRS business systems modernization" are on this year's list.

If recent events on Capitol Hill are any indicator, however, Congress is not likely to completely honor the president's request for greater funding of either the tax enforcement or systems modernization initiatives. In the very early hours of Feb. 19, the Republican-controlled House passed a continuing resolution (CR) to fund the government for rest of FY 2011 that cut more than $61 billion from FY 2010 levels. Those cuts include a $603 million reduction to the IRS's budget over the next six months, $285 million of which comes from the tax enforcement budget and $227 million from the agency's operations support budget.

If House Republicans refuse to fund the IRS even at FY 2010 levels, there is no chance they are going to consider the president's higher FY 2012 request. In addition to a budget request that would increase tax enforcement and IT capabilities, the FY 2012 IRS request includes important increases in funds for taxpayer services, which provide help to taxpayers through outreach, and funds to implement the Affordable Care Act – a measure anathema to the majority of congressional Republicans.