It is interesting to consider why the Internal Revenue Service continues to face daunting budget cuts year after year. It is fairly well known that our government has been spending more than it's taking in for many years now. So when we hear about a governmental agency's budget being reduced, it generally comes as no surprise. However, when it comes to the IRS, it does leave many scratching their heads, myself included. I have over a decade of experience working in tax departments for large regional CPA firms on the West Coast and in the Midwest, so I am quite familiar with the IRS.
Budgets, of course, essentially come down to income and expenses. And yes, there may very well be spending (or expense) problems in Washington. Many people believe there are. Because of partisan politics, people on different sides of the political divide frequently disagree about which programs are the ones that are being overspent on; however, when deficits are perennial, it's difficult to say with a straight face that we have no issues with spending in this country.
Back to the IRS though: They are the agency that is responsible for bringing in the revenue. "Revenue" is, in fact, the middle word in the acronym. So, even though our spending issues persist, it seems to me that we would want to optimize our revenue collection efforts as well. It seems logical to me that indeed because our spending issues persist, it is actually increasingly important that we make a concerted effort in regards to revenue collection to help mitigate the budget gap and the tax gap. Many estimates put the tax gap in the $500 billion range annually.
Congress continues to expand upon its Band-Aid approach to the Tax Code, making it more difficult for the IRS to do its job. This year, the service will be tasked with additional compliance responsibilities stemming from the Affordable Care Act, so will they get more money in their budget to help with this enforcement? Nope, their budget continues to get cut.
Now, if it really was as simple as the above, it would be problematic to some degree but not completely surprising. Many businesses over the past several years have had to find a way to do more with less.
Where it becomes surprising, from my perspective, is that available data consistently indicates that each dollar of enforcement revenue spent (allocated to the IRS) results in about $4 of additional collection activity. This is where the waters get quite muddy for me. The U.S. government is consistently running a big deficit. Some progress has been made in decreasing the deficit, but it is still enormous. And enormous is not even a big enough word when it comes to our national debt. It is currently over $18 trillion! That is an absolute monstrous number.
So, just to recap why I'm a bit confused as to why the budget of the IRS continues to get slashed:
- The United States is in an enormous amount of debt and consistently runs budget deficits;
- The Internal Revenue Service is the agency responsible for bringing in revenue;
- Study after study indicates that additional monies spent on collection activities increase revenue; and,
- The budget of the IRS continues to get hammered.
Am I the only one who is scratching their head over this? It just seems quite counterintuitive. What are some possible reasons that this logic would make sense? Or is it just completely cavalier of me to think that logic applies within the Beltway?
It's hard to believe that a 400 percent return would be less than adequate, so what else could it be? Is it perhaps a lack of information available to those in Congress? Are they just more comfortable with slashing the budget of bean counters than other agencies for whatever reason -- regardless of the opportunity cost? What about lobbyists? Anyone with a sophisticated knowledge of the Tax Code can see rather clearly that many tax provisions primarily benefit some large lobbying groups. Not to go into too much detail, but if you look at some of the most powerful lobbying groups and some of the biggest political donors, it's pretty easy to trace tax laws that seem codified for their advantage.
Some have speculated that members of Congress on a certain side of the aisle were interested in punishing the service after there were indications that the nonprofit division of the IRS based in Cincinnati was being hyper-critical of approving nonprofit status for certain right-wing organizations. If this is the case, it seems like this reaction would be consistent with the proverbial cutting off your nose to spite your face ... .
The IRS has had to shed more than 8,000 jobs in recent years to deal with the budget cuts, and there is clear evidence that these cuts have had a detrimental impact upon collection efforts. The IRS currently faces the additional responsibilities stemming from legislation in the ACA and an increasingly complicated Tax Code with fewer resources at its disposal.
Not to mention the fact that Congress seems quite comfortable with consistently passing tax laws for the tax year with around two weeks left in the actual applicable tax year. Is this the way that one of the premier nations in the world should enact its tax policy? If this is a government for the people and by the people, then why do "the people" only get a couple of weeks of clarity regarding the tax laws they must adhere to out of the 52 weeks of the year? It is difficult to see how this kind of approach to tax codification is not doing a disservice to the business community and taxpayers in general.
IRS Commissioner John Koskinen has explicitly indicated his concerns regarding the ability of the service to adequately perform its multi-faceted duties at its current enforcement budget. It seems to me that the current approach that is being taken to revenue enforcement is short-sighted at best and more likely outright irresponsible and borderline foolish.
There is some light at the tunnel for the service, however. Even if the IRS continues to get treated with the disdain that is ostensibly apparent, accountants are smart people. And the service has consistently embraced e-filings, e-payments, and other automated functions that can allow it to do more with less. The service has also implemented new reporting requirements related to taxpayer information by brokerage houses and others. This "matching" is an important tool in the service's tool belt.
In addition, Koskinen is by all accounts a forward thinker and has explicitly indicated his vision for a completely online filing process in the not-too-distant future. Taxpayers and their agents would be able to access tax clouds or something of the like, where the taxpayer's information is stored. This data could be shared and accessed in real time by authorized personnel and may be able to facilitate a more efficient, automated and accurate method for tax reporting and compliance in the years to come.
Daniel Engelhardt is a tax accountant at Burke & Schindler, in Cincinnati.
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