Obama Proposes Exempting IRS Enforcement from Budget Caps
One of the main objectives of President Obama’s fiscal year (FY) 2013 budget request for the Internal Revenue Service (IRS) is to reduce the "tax gap," the difference between what taxpayers owe each year and what they actually pay. The president’s IRS budget request seeks funding increases for both taxpayer services and enforcement programs. Recognizing that a dollar spent on collecting revenue more than pays for itself, the Obama administration has proposed to exclude some IRS enforcement spending from the budget caps imposed by 2011's debt ceiling deal (known as the Budget Control Act).
In January, the IRS released its latest report on the tax gap. The report concluded that in 2006, the most recent year for which information is available, Americans underpaid their taxes by $450 billion – an underpayment that was $105 billion more than occurred in 2001, the last time the agency reported on the tax gap.
The Obama administration is seeking $5.7 billion for FY 2013 for the IRS enforcement budget – a $402 million increase over the estimated $5.3 billion budget the enforcement division had this current fiscal year (see table below). But this request is still $17 million less than the agency's inflation-adjusted budget in FY 2010 – which was a high-water mark for the division and a reversal of the decreasing enforcement budgets enacted under President George W. Bush's administration.
IRS’s enforcement activities fall under discretionary spending and the Budget Control Act’s spending caps. However, exemptions to those caps are made “for activities that generate benefits that exceed programmatic costs.” These exemptions currently exist for programs that help detect and eliminate fraud within Social Security and Medicare.
Because the pursuits of the IRS enforcement division fall under the larger rubric of activities that generate revenues beyond their costs, President Obama is arguing that $277 million of enforcement program spending in FY 2013 should not count against domestic spending caps. Known as a “program integrity cap adjustment,” the move would mean that IRS enforcement spending would not be competing against other national priorities for funding.
Among the enforcement programs the White House is recommending be increased to raise revenues are:
- An additional $111 million to fight offshore tax evasion, which the IRS estimates will bring in $6.40 for every dollar invested by FY 2015
- An increase of $39 million to improve international businesses’ compliance with the tax code through hiring additional international technical specialists to review business tax returns. The IRS estimates a return on investment of $8.80 per dollar invested
- An additional $129 million to implement recent legislative tax changes, including new reporting requirements and certain provisions of the Affordable Care Act (ACA), which the IRS estimates will bring in $3.50 for every dollar invested
- An increase of $88 million to implement the “Revenue Protection Strategy,” which allows the IRS to adjust a taxpayer's refund if examiners catch errors. The IRS estimates this initiative will return $1.90 per dollar invested as soon as new hires reach their full potential in FY 2015
- An additional $35 million to continue certifying tax preparers, which the IRS estimates will bring in $2.30 for every dollar invested by FY 2015
The IRS estimates that combined, these funding increases will bring in an additional $673 billion in FY 2013 alone, and, by FY 2015, an estimated $1.5 trillion in additional annual revenue.
The administration is also requesting that Congress restore the IRS enforcement funding that House Republicans stripped out of the continuing resolution that funded the federal government in 2011. President Obama is asking that Congress restore $127 million in funding for the IRS to audit individual tax returns, which the agency estimates will generate $662 million, for a return on investment of $6.30 per dollar invested. The administration is also asking that Congress return $73 million to IRS's collection coverage efforts, which would restore another $487 million in annual revenue for a return on investment of $7.60 for every dollar invested.
Experts generally agree that for every dollar invested in the IRS enforcement budget, taxpayers receive a $4-to-$5 return on investment. Additionally, all of these programs provide a positive revenue effect through deterrence, as potential tax cheats are less likely to try to game the system when the likelihood of an IRS audit rises. The agency estimates the deterrence effects of each of the programs above triples the actual tax revenue collected.
The administration's latest funding requests are part of a long-term plan to improve tax collection and ensure compliance with the existing code. The White House says it will propose "roughly $350 million in new revenue-producing initiatives above current levels of enforcement and compliance activity" each year through 2017. The administration will also ask Congress to adjust each of the previous year's funding requests for inflation and sustain this funding through 2022. The Office of Management and Budget (OMB) estimates the total cost of starting and sustaining these new initiatives to be roughly $17 billion over the budget window, but the programs will bring in an additional $44 billion in revenue over that same period.
However, last year, the House lowered IRS funding and put restrictions on hiring new IRS tax enforcement agents; House Republicans, with the aid of conservative Democrats, are likely to once again try to stymie attempts to increase IRS resources and capacity to enforce the tax code. Without adequate funding, the IRS will lack the array of tools necessary to enforce the tax code fully, much needed revenue will be lost, and honest taxpayers will be denied the equity in the tax code that they expect and deserve.