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The IRS Is in Crisis and the Tax Community Needs to Help

Posted on December 14, 2015 by Martin Lobel

We are on the edge of a precipice. Unless those who know the importance of the IRS take action, we are on the verge of losing the respect and, indeed, fear of the IRS that makes it such an effective revenue raiser. And, without sufficient revenue, we don't have a government that can meet our essential needs.

For the last five years, Congress has cut1 the IRS's budget while simultaneously piling new responsibilities on it.2 Far too many people simply don't understand the importance of having an effective tax collecting agency. Look at how many citizens support presidential candidates calling for the abolition of the IRS or proposing a three-page tax code. And those are the same candidates who claim to be concerned about our deficit. Apparently no one told them that the IRS returns more than $4 for every dollar that it receives, which is about half of what the OECD countries spend to collect the same amount of revenue.

No one would claim that the IRS is perfect, but the congressional appropriation cuts have reduced employee training by more than 80 percent and forced staff reductions to the point that more than 60 percent of taxpayers calling the IRS for assistance during filing season were unable to get through. These problems will get worse because of the aging of the existing experienced workforce and the drop in new hires to replace them. Since 2010 the number of IRS employees has dropped by 15 percent. And in 2014 alone, almost 1,000 enforcement personnel were lost, which resulted in 11 percent fewer examinations in fiscal 2014 than fiscal 2013.3

It is time for those who know the most about the IRS and the tax code to stand up and tell the truth:


    1. You cannot abolish the IRS and have a government. Taxes are the price we pay for a civilized society. Taxes are necessary to fund a strong military and infrastructure that allows our economy to function efficiently.

    2. You cannot reduce the tax code to three pages, unless of course you want to eliminate all tax expenditures, no matter how beneficial, and eliminate tax accounting. We live in an increasingly complex world, and the global economy has become increasingly important.

    3. You cannot keep cutting the IRS budget without losing substantial revenue and encouraging cheating on taxes because the policeman has been taken off the beat. Taxes are paid because people respect the IRS and, more importantly, fear being caught. If they can't get assistance from the IRS when filing their taxes or are confident that the IRS won't catch them, the equation changes and cheating becomes endemic, as it is in, for example, Greece.

    4. You must support real tax reform. Most of the antitax, starve-the-government movement is composed of people who believe that the code is responsible for the economic inequity that fuels their anger. They are not wrong. Over the last 30 years, almost all of the growth in the GDP has gone to the top 10 percent, most of that to the top 1 percent and 0.1 percent.4 Over that period the middle class has lost inflation adjusted income and social status, while the financial sector has almost doubled its share of GDP.


Just taxing the rich won't solve the problem. Everyone, including the middle class, will have to pay more in taxes to fund the necessary expenditures that keep our country growing. While it is true that the very rich pay a lower share of their income in taxes than the middle class, it is also true that, despite common belief, the middle-class tax burden is fairly low when compared with historic levels.

The middle class is right to believe that the tax code favors the rich and well connected. Since 1986 our tax code has essentially been written by those who can afford the best-connected lobbyists. Rather than figuring out what kind of government we want and then figuring out the most efficient and least intrusive way to raise the revenue needed, we have reversed the process. Congress has focused on cutting expenditures and seeing what survived. That's counterproductive. The major "reform" proposal being pushed in Congress -- territorial taxation -- will increase the tax burden on ordinary citizens and domestic businesses and lower the tax burden on multinational corporations, both foreign and domestic based, thereby increasing the incentives to move jobs and profits offshore. But most people don't know that because those who advise domestic businesses and individuals haven't told them, and it's "too complicated" for the mainstream media.

Fortunately, there are some who recognize the problem. Seven former IRS commissioners, Republican and Democratic, as well as the National Society of Accountants, have written Congress opposing the IRS budget cuts.5 But much more needs to be done besides increasing the IRS's budget. We need to help improve the efficiency and transparency of the IRS. We need to help simplify the tax code and regulations to make them fairer and more efficient in raising the revenue needed to run our government. And we need to tell the truth when politicians promise panaceas that they should know are false for their own personal political gain.


FOOTNOTES

1 Since 2010 IRS appropriations have been cut by $1.2 billion, or 17 percent.

2 For example, the Foreign Account Tax Compliance Act and the Patient Protection and Affordable Care Act have significantly expanded the IRS's tax administration burdens. Also, Congress has tasked the IRS with administering socio-economic incentives to the tax code, including healthcare, retirement, social welfare, education, energy, housing, and economic stimulus, none of which are related to the IRS's primary function of raising revenue.

3 Interestingly, gross receipts receivable in fiscal 2014 increased by $412 billion, primarily due to a few large dollar examination cases according to a 2015 Treasury Inspector General for Tax Administration report.

4 Emmanuel Saez and Gabriel Zucman, "Wealth Inequality in the United States Since 1913: Evidence From Capitalized Income Tax Data" (Oct. 2015), available at http://eml.berkeley.edu/~saez.

5 The House Appropriations Committee's fiscal 2016 budget would cut the IRS budget by $838 million from fiscal 2015, while the Senate Appropriations Committee proposed a budget cut of $470 million. The Obama administration, on the other hand, proposed an increase from the 2015 fiscal budget of $10.9 billion to $12.9 billion in fiscal 2016.


END OF FOOTNOTES