Tax Analysts Blog

IRS Strategic Plan Highlights Effects of Budget Cuts

Posted on Jul 1, 2014

Make no mistake -- the IRS deserves all the heightened scrutiny and even scorn from congressional Republicans. Its conduct during the exempt organization scandal and the ongoing aftermath has been appalling. Those looking for a conspiracy and White House involvement are missing the point. The IRS’s failure to notify Congress when it first discovered inappropriate conduct and its misleading answers about why officials dodged direct questions are inexcusable, regardless of what anyone thinks about the motivations behind the original actions. But as the 2014-2017 strategic plan shows, starving the IRS of funding might be an example of cutting off the nose to spite the face.

IRS funding is down by nearly $1 billion since 2010. House Republicans, however, aren’t satisfied. On June 25 the House Appropriations Committee approved a bill that would cut the IRS budget by a further 3 percent. Most of the cuts are to operations and business systems modernization. But the bill would slice enforcement spending by 1 percent, which seems counterproductive given all the research that shows each dollar spent on enforcement produces about $4 in new revenue.

It’s a well-established narrative that the IRS is being asked to do more with less. The Service is being called on to implement FATCA and healthcare reform. It is also being forced to allocate considerable resources to comply with requests for information from Congress on the EO scandal and other matters, although that is something that isn’t likely to elicit much sympathy from Republicans or IRS skeptics.

The effects of the cuts, combined with additional responsibilities, began to really show last year. IRS phone service levels have fallen precipitously. It answered 87 percent of all calls in 2004. That fell to just over 60 percent last year. The Service has cautioned it might fall to 50 percent if funding is maintained at sequester levels.

The IRS strategic plan for 2014 through 2017 doesn’t even mention trying to improve phone service. Instead, it focuses on the effects of attrition and an aging workforce. According to the plan, 41 percent of IRS managers and 61 percent of executives will be eligible for retirement by 2016. This brain drain has been highlighted by opponents of the hiring freeze in place. Some might argue, however, that a complete turnover in leadership at the agency might be needed.

The IRS’s audit rate continues to fall as a result of fewer funds. It will be only 0.8 percent of individual returns in both 2014 and 2015. That’s the lowest level in decades. Despite the falling audit rate, the strategic plan somewhat optimistically assumes that the Service can actually increase voluntary compliance rates. The IRS hopes to increase that rate from 83 percent to 86 percent. Considering that voluntary compliance has been relatively stable since 1985 (83.6 percent), it’s seems unlikely that it will improve in an era of no audits and falling taxpayer morale.

The strategic plan highlights the continuing success of e-filing and predicts that number will hit 90 percent by 2017, up from 83 percent in 2013. The IRS hopes to move more taxpayer service electronic communication. The plan sets a goal of 75 percent of agency interactions being available online by 2017, up from 50 percent today. Using more electronic communication is a means of compensating for the declining phone service, although the plan doesn’t specifically link the two.

The IRS has brought a lot of its trouble on itself. The EO scandal, the lost Lois Lerner e-mails, its failure to communicate openly with Congress, and the flak over lavish conferences and training videos has undermined both public and lawmaker support for the agency. And many Republicans didn’t really need new reasons to dislike or distrust the IRS. But the federal government is facing a fiscal crisis. It needs every dollar it can get, whether it’s to fund new spending initiatives, pay for tax rate cuts favored by the GOP, or just keep deficits and government debt in check.

A crippled tax collector means a damaged tax system. And a damaged tax system only hurts taxpayers and the federal government as a whole. Congress should focus more on punishing those responsible for the various missteps at the IRS and less on gutting the nation’s revenue collection and tax administration system as a whole.

Read Comments (2)

AMT buffJun 30, 2014

Our tax system will remain damaged until the IRS establishes and enforces a
zero tolerance policy for partisan behavior. An affirmative action program to
put some libertarians in positions of authority would help too. The IRS appears
to have become as much of an ideological monoculture as Hollywood or the city
government in San Francisco.

Since the leadership at the IRS won't even admit that the problem exists,
Congress has only one means to force reform: Funding.

Edmund DantesJul 3, 2014

Steve Forbes is on your side, AMT buff, as am I.

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