Problems Faced by Taxpayers

As is the case with all government agencies, budgets fluctuate with changing administrations, but what sets the Internal Revenue Service (IRS) apart is it gathers the money to keep all those government agencies running. Where a severe cutback for another agency or department may only mean inconveniences for those involved, cutbacks the IRS has undergone have greatly affected how taxes are enforced. Despite this, total revenue for the federal government has remained mostly unchanged, creating an interesting dynamic between a shrinking agency and a growing economy.

For every $1 spent on tax collection, the IRS accumulates about $4. (Davidson 2) According to the Joint Committee on taxation, almost half of IRS revenue is individual income tax alone, and as of 2017, that figure came out to about $1.6 trillion. (Heath 1) Tax evasion or noncompliance is illegally failing to report or pay income tax, whereas tax avoidance refers to legal steps taken to reduce tax costs, such as a retirement fund. Because there is about a 400 billion dollar tax gap, or the difference between taxes owed and taxes paid, (Thorne 3) there is a need for investigation into suspicious individuals or corporations.

Firms are usually selected for an audit either because some aspect of their tax filing documents is suspicious, or because their assets exceed $10 million. (Tedds 2) In total, businesses evaded $174.6 billion in taxes in the 2001 fiscal year, almost 10% of taxes paid by choice. (Tedds 1) Even now, the ability of the agency to enforce tax codes is still diminishing. The I.R.S. is pursuing fewer cases of tax evasion than it did just over 5 years ago, mainly due to budget cuts, which have significantly reduced the criminal investigation section.

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(Eisinger 1)

“Since FY 2010, the IRS budget has been reduced by 20 percent on an inflation-adjusted basis, and the IRS workforce has declined by about the same percentage,” Nina Olson, a national taxpayer advocate, told Congress last May. (Davidson 2) Already only 60% of calls to IRS offices were answered, and a reduction in staff could diminish that number even more. (Davidson 1) A smaller budget means a smaller staff, and IRS staff numbers have declined by 33%, from 22,710 in 2010 to 15,357 in 2018. (Heath 1) Fewer staffers mean the agency can no longer enforce taxes as effectively, and the rate at which the agency audits tax returns has plummeted by 42 percent since the budget cuts started. (Eisinger 2) Similar tax enforcement measures, such as levies, liens, and seizures, have also fallen. (Thorne 3). Former commissioner Mark Everson says the psychological effect that IRS audits has on taxpayers is more important than the revenue gained. (Thorne 4) In addition to reclaiming lost revenue, tax fraud cases are meant to persuade taxpayers to avoid noncompliance, for fear of legal repercussions. (Eisinger 1) With fewer examinations, the temptation to cheat grows. Criminal cases have dropped from 589 in 2012 to 328 in 2016, and with the government conducting 1.2 million audits in 2016, that’s one criminal case for every 3,600 audits. (Eisinger 2) Individual and small firms’ tax returns were investigated only 1% of the time in 2011, but since then, audit cases with major firms fell drastically, from 1 in 5 to less than 1 in 10. Individuals have less than a 1-in-160 chance of being audited (although one’s chances depend on income), down from 1 in 90 for 2011. (Thorne 2) Despite this, net revenue from enforcement came to $40 billion last year. (Thorne 4)

For years, Americans have been stowing approximately $1.2 trillion in personal assets in foreign accounts, particularly in Switzerland and Asia, without reporting it. The IRS and Justice Department have made eliminating such accounts a priority. (Eisinger 2) After making settlements with banks such as UBS and Credit Suisse, the IRS gave Americans with offshore accounts the opportunity to close their accounts and pay a smaller penalty. This deal presented the government with $11.1 billion, and several cases against individuals for hiding accounts. (Eisinger 2) During the Obama administration, the IRS proposed the Foreign Account Tax Compliance Act (FATCA), which would require banks with American accounts to report those individuals’ information to the U.S., but the bill received no funding. (Eisinger 3) Other methods of tax evasion have emerged as audit rates fall. Small exaggerations, such as a business trip to Disneyworld, a hobby exaggerated as a business, business trips to vacation spots, etc., make one more likely to be audited.

The IRS is not free of fault, however. In the case of tax enforcement and compliance, politicians, attorneys, and the like have a hand in what goes on. (Mete 1) Michael Cohen and Paul Manafort present two of the most common cases of tax cheating, and how the I.R.S. has struggled to enforce honest taxes. Cohen did not report income from personal businesses, while Manafort used foreign accounts and shell corporations to hide assets. (Eisinger 1) Their influence in politics has sparked much speculation about the privileges of those connected to power. (Eisinger 1) Taxpayers try to avoid IRS scrutiny, while the IRS ignores special interests in favor of the general good when it responds to noncompliance with even stricter enforcement. Therefore, the agency moves toward efficient enforcement depending on individual settlements. (Mete 1)

In the federal government’s defense, IRS efforts have been focused elsewhere lately, as identity theft soars. The I.R.S. management assigns hundreds of agents to chase criminals who used stolen identities to collect tax refunds. (Eisinger 2) Additionally, agents are more interested in crimes only somewhat related to taxes. “It was usually narcotics, Ponzi schemes, some public corruption,” said Rob Warren, a research associate at Catholic University. “Agents loved Ponzi cases because there was a real victim, an old lady or something like that.” (Eisinger 2) And tax crimes, like failing to declare illegal income from, say, a bribe or cocaine sales, can be easier to prove than bribery or drug trafficking. (Eisinger 2)

Budget cuts to the IRS have not been completely negative, however. By at least one measure, the IRS is more efficient in its use of resources. A smaller budget means costs are down, and an expanding economy has helped to increase overall tax revenues. (Thorne 1) Over the past several years, the cost of collecting tax revenues has fallen 29%. (Thorne 1) While the staff dropped 14%, spending declined by $533 million. Spending within the agency has declined by $533 million and staff numbers have dropped 14 percent since 2012. (Thorne 1) There may not be as many actual IRS audits, but notices seem to be more prevalent addressing specific issues, such as proof of mortgage interest deduction or charitable contributions. (Heath 2)

Under the Obama administration, Republican-controlled Congress made drastic cutbacks to IRS funding as punishment for seeking out nonprofit organizations. Defenders of the cutbacks have said the IRS is suffering because of mismanagement, but David Burton, a senior fellow of economic policy at the Heritage Foundation, says there is a lack of responsibility, and that Congress should not punish the IRS, but instead oversee more IRS dealings. The IRS situation is fairly gloomy at the moment, but things have changed with the new administration. (Davidson 1) In preparation for President Trump’s new tax and tariff policies, improvements have been made to the IRS budget. The overall budget has been bumped to $11.4 billion in the next fiscal year, however, it is still down from the $12.1 billion they received in 2012. (Stein 1) The agency regained $320 million in funding from a recently passed, $1.3 billion omnibus spending package, falling $77 million short of what IRS acting commissioner David Kautter asked of Congress. (Stein 1) Even so, the boost can be used for enforcement, operations support, and taxpayer services. (Davidson 1) To address the rising concern about decades-old technology in IRS offices a bill was passed In the House last April to improve infrastructure with nearly unanimous support from both Democrats and Republicans. (Thorne 6) This outdated technology was the cause of the April 17, 2018 system crash on tax day. (Thorne 6) Historically, Congress has always increased funding for the IRS before implementing a new law, (Stein 2) but as many believe President Trump’s new law to be the most drastic change, the IRS could be undergoing more changes.

Works Cited

1. Davidson, Joe. “IRS Chief Says Trump’s Budget Would Sharply Cut Taxpayer Service.” The Washington Post, WP Company, 1 June 2018, www.washingtonpost.com/news/powerpost/wp/2018/06/01/irs-chief-says-trumps-budget-would-sharply-cut-taxpayer-service/?utm_term=.c5869e625c98.
2. Eisinger, Jesse, and Paul Kiel. “I.R.S. Tax Fraud Cases Plummet After Budget Cuts.” The New York Times, The New York Times, 1 Oct. 2018, www.nytimes.com/2018/10/01/business/economy/irs-tax-fraud-audit.html.
3. Heath, Thomas. ‘Your chances of an IRS audit are way down. But keep it on the up and up.’ Washington Post, 6 Apr. 2018. Opposing Viewpoints in Context, http://link.galegroup.com/apps/doc/A533597954/OVIC?u=tamp56475&sid=OVIC&xid=eb579709. Accessed 7 Nov. 2018.
4. Mete, Mihriye. “Bureaucratic Behavior in Strategic Environments: Politicians, Taxpayers, and the IRS” The Journal of Politics Vol 64, No. 2. JSTOR Journals, http://eds.b.ebscohost.com/eds/detail/detail?vid=6&sid=faa271f8-e042-463e-9353-3024d0880b04%40pdc-v-sessmgr06&bdata=JnNpdGU9ZWRzLWxpdmU%3d#AN=edsjsr.2691853&db=edsjsr
5. Stein, Jeff. “The IRS Gets Help from Congress as It Tries to Implement the New GOP Tax Law.” The Washington Post, WP Company, 27 Mar. 2018, www.washingtonpost.com/news/wonk/wp/2018/03/27/the-IRS-gets-help-from-congress-as-it-tries-to-implement-the-new-GOP-tax-law/?utm_term=.fd7e982aa2f8.
6. Tedds, Lindsay M., “Keeping it off the books: an imperial investigation of firms that engage in tax evasion” Applied Economics, 2010. EBSCO Host, DOI: RAEC_A_285977_O 2459..2473 http://eds.a.ebscohost.com/eds/pdfviewer/pdfviewer?vid=12&sid=d2524738-75c7-4aed-a863-18a3bb454f87%40sessionmgr4008
7. Thorne, James. “Years of Budget Cuts Shrink the IRS, and Corporations Are the Big Winners.” CNBC, CNBC, 12 May 2018, www.cnbc.com/2018/05/11/budget-cuts-shrink-the-IRS-and-corporations-are-the-big-winners.html.