Think Tank Warns Against Overstretching the IRS

As the Internal Revenue Service is inundated with millions of tax returns as well as a “continually increasing mission scope” of implementing new tax laws and dispersing stimulus payments, the agency’s budget has been in freefall, a new report by a market-oriented think tank warns.

Since 2010, the IRS budget has fallen by 20% in inflation-adjusted dollars, resulting in the elimination of 22% of its staff, according to a new report by the American Council for Capital Formation.

As millions of Americans filed tax returns last week, the IRS finds itself “strained under continued decreasing budgets and eliminated staff,” the report states.

“Congress should ensure that the agency is adequately funded to perform its core duties effectively and think carefully before assigning additional tasks to an overworked agency without considering the ramifications for revenue collection and taxpayer service,” said ACCF Chief Economist Pinar Çebi Wilber, in releasing the report.

COVID-19 and the additional workload that came with three stimulus packages have cast a spotlight on the IRS’ struggles in numerous areas, the report states, including:

• Revenue Collection, Enforcement and the Tax Gap: In line with budget cuts, the chances of being audited has decreased, increasing the tax gap (the difference between the tax liability for a given tax year and the amount that is paid) and reducing revenues the agency collects.
• Taxpayer Services: The services provided by the IRS, such as answering calls and emails and other means of taxpayer interaction have been declining. These services are especially important to help taxpayers to navigate the complex tax code and catch mistakes before returns are submitted.
• Operations Support and Business Systems Modernization: The IRS’ outdated information technology system has been a cause for a concern in light of increasing e-filing, wider data collection and security gaps that make the whole system susceptible to cyberattacks.

The IRS, the report notes, was tasked with distributing three rounds of stimulus checks to taxpayers. “This herculean task, in some sense, took precedent over the IRS’ other duties, creating problems for some taxpayers as outlined by the National Taxpayer Advocate,” the report states.

ACCF cites recent comments made by National Taxpayer Advocate Erin Collins on the IRS’ workload.  “It is morphing the IRS into this dual mission of both tax administration and administering of social programs. The challenge is the IRS was not set up for that purpose and their IT is not structured for that … I am concerned that the IRS systems were not created to do monthly checks … I think if you ask the IRS, they say, ‘We will get it done.’ And they will get it done. But my concern is, at what cost?”

The Treasury Department said Thursday that the tax gap totaled nearly $600 billion in 2019 and will rise to about $7 trillion over the course of the next decade if left unaddressed — roughly equal to 15% of taxes owed.

The Treasury analysis is part of a report released Thursday on President Joe Biden’s tax compliance initiatives that seek to close the tax gap as part of his American Families Plan.

The ACCF report notes that revenue collection and enforcement accounts for the largest share of the budget, “and for a good reason.”

The goal of the IRS “is to collect the revenue due within the legislative framework provided and ensure the appropriate level of revenue is collected by minimizing under-reporting and tax evasion,” the ACCF report states. “However, one hundred percent compliance is difficult to achieve due to the complexity of the tax code and the information and infrastructure needed to administer the tax code and follow every taxpayer. This results in a tax gap and the ultimate goal of the agency is to decrease the gap by various methods.”