Budget Cuts at the IRS Leave Phones Ringing and Hurt the Middle Class
by Scott Klinger, 4/10/2015
As Tax Day approaches, the news is filled with stories of unanswered phone calls at the Internal Revenue Service (IRS). The stories will spark an eye-roll or a sarcastic mumble about our “unresponsive government.” But most will fail to mention that the IRS is an agency dealing with a 17 percent cut to its budget since 2010. These cuts have meant there are 26 percent fewer IRS workers answering questions than there were five years ago, even though the number of people filing returns has grown by seven million.
More than 100 million Americans are expected to try to contact the IRS with questions about their taxes. Only about 40 percent will succeed in reaching an IRS employee, and those that do will have waited an average of 28 minutes on hold. And when they do reach an IRS agent, the person at the end of the line may not be able to answer more than the most basic questions because the IRS is training far fewer employees to be issue specialists. People who try IRS walk-in centers around the country may be even more disappointed – many are not open during the evening or on weekends.
Cuts in IRS funding and resources increase the country’s deficit.
The IRS has lost 18,000 employees since 2010, 10,000 of them in the enforcement division, a 20 percent cut from 2010. Each revenue agent brings in $1.2 million, on average, in tax revenue that would otherwise go uncollected.
The loss of these enforcement positions means the IRS is conducting fewer audits. The audit risk for a household with more than $100,000 in income declined eight percent between 2013 and 2014. The IRS has also scaled back its audits of large businesses (those with more than $250 million in assets). In 2013, they audited more than 34 percent of such businesses; last year, it was just 26 percent. International transfer pricing abuses by large multinational corporations are one of the most serious abuses within the tax system, costing the country between $40 billion and $133 billion a year, yet the IRS lacks adequate resources to conduct the extensive audits required to collect this tax revenue.
When the IRS budget is cut, middle-income taxpayers feel the squeeze more than high-income taxpayers and corporations.
As a part of mandated budget cuts, Congress has slashed the travel budgets of the enforcement division, making it hard for IRS auditors to conduct the costly face-to-face field audits that wealthy families and large corporations require. In 2014, the IRS conducted 292,000 field audits, 15 percent fewer than the previous year. Instead, enforcement resources are focused on less expensive correspondence audits conducted through the mail. These audits focus on low- and middle-income taxpayers and generate far less revenue per audit than those focused on wealthier taxpayers. While the risk of audit has fallen for wealthy taxpayers, moderate-income taxpayers saw their likelihood of being audited rise by 17 percent.
Not surprisingly, with fewer resources devoted to enforcement, the “tax gap” – the difference between what is collected and the amount of federal taxes actually owed – has grown to $448 billion, nearly enough to eliminate the entire budget deficit. But collecting more of this revenue will require significant increases in IRS staff. President Obama’s budget takes the first step, calling for a more than 18 percent increase in IRS funding.
The additional funding could help the IRS respond to two new needs: identity theft and the new health care rules. Identity theft has exploded in recent years. Last year, 2.9 million taxpayers saw criminals file fraudulent tax returns under their name in order to steal their tax refunds. To respond to this problem, the IRS pulled 3,000 employees from other activities to deal with identity theft problems. The second new responsibility for staff is enforcing the health insurance mandate of the Affordable Care Act. In 2014, uninsured taxpayers will face a penalty for not having health insurance – it will be paid out of their tax return. Once again, more responsibilities for already-stretched IRS staff.
The legitimacy of the tax system depends on fair and effective collection.
As IRS budgets are cut, and the wealthiest taxpayers see their audit risks drop, we are likely to see the nation’s tax gap rise even more. As Americans see their neighbors getting away with shirking their responsibility to pay taxes, they will lose confidence in the fairness of the tax system.
Each dollar the IRS spends on enforcement results in $6 of additional tax collection. The IRS is efficient. In fact, it costs far less to collect an additional dollar of tax revenue than it did a generation ago. But draconian cuts in staff over the last five years, expected to continue into the future, seriously undermine the IRS’s ability to do its job. These cuts weaken the country and threaten to both increase the deficit and undermine our ability to pay for the public investments in infrastructure and education that we need to keep our economy competitive and our families secure.