Following nearly a decade of cutbacks in the Internal Revenue Service’s funding, many observers are concerned about the agency’s ability to enforce the tax code. Despite some promising features, the President’s FY 2020 IRS budget would make only a small dent in noncompliance. The bad and uncertain features will outweigh the good. What is missing? A long-term commitment to provide adequate resources to address the tough cases—noncompliance by taxpayers with complicated finances, such as the wealthy, business owners, and corporations.
We don’t know how much tax went unpaid in 2018 because of noncompliance, but the most recent IRS estimates revealed that the average annual gap between taxes owed and taxes ultimately paid exceeded $400 billion (about 16 percent of taxes owed) from 2008 through 2010. Since 2010, the IRS’s funding has fallen by over 20 percent in inflation-adjusted dollars, and the overall audit rate dropped by nearly half—an ominous sign for current compliance rates.
The Administration budget acknowledges the problem. It would increase the IRS base budget from $11.2 billion to $11.5 billion and add another $362 million for enforcement. Most of the increase in the base budget is aimed at improving the IRS infrastructure—especially its antiquated computer systems that rely on decades-old programming language. While those upgrades will expedite detection of noncompliance, putting them in place requires a multi-year investment that the IRS says it will detail in its forthcoming Integrated Modernization Business Plan.
But with the good comes the bad: The proposed budget would cut funding for taxpayer services by 7 percent. Consequences could include fewer updates to helpful publications and more time waiting to speak to IRS customer service reps. Taxpayers’ unanswered questions lead to them making unintentional errors.
It is tricky to forecast how much the proposed increase in the agency’s enforcement budget will boost compliance. The administration is proposing $362 million more for audits and collections for 2020. The budget not only assumes a continuation of that funding over the next decade, it also calls for additional funding for enforcement each year up through 2024 and would sustain that financing through 2029. By the end of the ten-year budget period, the IRS would spend a total of $14.5 billion on new and mostly unspecified initiatives. That investment would generate, according to Treasury, $47 billion in revenues over the decade—a $33 billion net reduction in the deficit.
The administration can get there, in part, because under its budget the cap on total discretionary spending would exclude certain funding for efforts to improve “program integrity” such as taxpayer compliance.
Simply put—under the proposed budget guidelines, Congress could add money for IRS enforcement above the current spending caps.
A promise, however, is not a commitment. Funding for the IRS comes from yearly appropriations—so it is uncertain whether the money for new initiatives would be provided by future Congresses.
Faced with such uncertainty, the IRS may look for projects that do not require long-term investments. Its 2020 budget plan includes a goal of closing 162,000 correspondence exams and 38,000 audits that are conducted in person (known as field exams); the former focus on simple issues that can be addressed via letters from the IRS and cost far less than field exams. The largest amount of revenue would come from increasing the number of notices to taxpayers who appear to owe money because of mismatches between their self-reported income and the information forms (W-2s and Form 1099s) received from employers and other payers. This is a relatively simple task—but document matching for individuals’ returns fell by over a third since 2011.
The plan, moreover, does not specify the nature of future initiatives—in particular, whether the IRS would target the toughest cases that require much more than a computer algorithm to detect and a follow-up letter to investigate. The number of those cases has dwindled—with audit rates falling from 8 percent in 2010 to 4 percent in 2017 for people with $1 million in gross income and from 98 percent to 58 percent for corporations with at least $20 billion in assets. Audits of smaller corporations and owners of other types of businesses have also steadily declined over the decade. Addressing these enforcement challenges requires time-consuming investments: The people who can handle those cases must be trained by experienced staff and do not reach full potential for at least three years.
Don’t get me wrong—the IRS has plenty of low-hanging enforcement fruit to pick. But that is not a long-run strategy. Rather, the federal government must make a multi-year commitment to investments in the workforce capable of tackling the tough cases. And the president’s budget includes little more than a vague promise to do that.