Cutting IRS funding is a gift to America’s wealthiest tax evaders

FILE PHOTO: The Internal Revenue Service (IRS) building is seen in Washington, U.S. September 28, 2020. REUTERS/Erin Scott/File Photo

In their first act of legislative business, the new House Republican majority voted to cut funding for the Internal Revenue Service (IRS). The vote was a symbolic effort to repeal the $80 billion increase in funding the revenue agency received last year as part of the Inflation Reduction Act. Cutting IRS funding is a terrible idea. A well-funded IRS can distribute emergency aid quickly, serve taxpayers efficiently, and help ensure that millionaires have to follow the tax laws just like everyone else. It’s an essential investment in good government.

The IRS has been persistently underfunded for decades, but the years since 2010 have been particularly tough. Tax law expert Chye-Ching Huang notes that the enforcement budget of the IRS dropped by nearly a quarter in less than ten years. In 2017, the IRS employed less than 10,000 revenue agents—the last time that was true was 1953: the Brooklyn Dodgers were in the World Series, the median housing price was about $8,000, and the IRS was handling over 100 million fewer individual income tax returns a year. The IRS is also “overwhelmingly reliant” on antiquated technology, the U.S. Taxpayer Advocate notes, “systems that are at least 25 years old, use obsolete programming languages (e.g., COBOL), or lack vendor support, training, or resources to maintain.”

It is worth noting how much the IRS has managed to achieve despite its perpetually inadequate resources. When COVID struck, for example, only the IRS had the capacity to send millions of emergency checks to keep American households afloat. As my Tax Policy Center colleague Howard Gleckman has said, the IRS “did an extraordinary job in getting these checks out in very difficult circumstances.”

But the budgetary toll of persistent underfunding is unmistakable. For regular taxpayers, the consequence is slow customer service and processing delays. Some politicians have irresponsibly suggested that every new IRS employee will be a gun-toting enforcement agent. Actually, the IRS desperately needs employees to process refunds and answer tax filers’ phone calls. Out of the 282 million phone calls the IRS received in 2021, only 11% or 32 million were actually answered. Nearly half the new IRS money is going to taxpayer services and modernization, which will make the agency more responsive and efficient for taxpayers.

About $45 billion of the $80 billion in new funding is going to enforcement, and that is great news. For the wealthiest and most sophisticated tax filers, a cash-strapped IRS has meant a tax evasion free-for-all. Currently, the tax gap, which is the amount in taxes that are owed but not paid, comes to nearly $7 trillion over a decade. Three fifths of the tax gap is due to underreporting of income by the top 10% of taxpayers, and more than a quarter comes from the top 1%.

But the IRS has been left without the resources to hire and support the kind of tax experts who can catch wealthy tax cheats. The lack of staff was highlighted recently when it was revealed that the audit of former president Donald Trump was staffed by exactly one revenue agent. But Trump wasn’t the only one whose taxes were going without thorough examination. Audits of millionaires have dropped 61% in less than a decade. For those making more than $5 million, the audit rate has dropped 87%.

At the same time, responding to a push from Congress, the IRS has focused instead on a much cheaper form of audit, targeting recipients of the Earned Income Tax Credit—i.e. low-income, working families. As a result, the EITC recipients are audited at the same rate as the top 1% of earners. As law professor Dorothy Brown explains, the consequence of high levels of EITC audits is a serious racial disparity in tax policing.

Treasury Secretary Janet Yellen has insisted that the new funding not be used to increase audit rates on those earning less than $400,000 a year. So, the new funding will help rebuild the capacity of the IRS to audit the wealthy, making the tax system far fairer. And, of course, closing the tax gap raises revenues—it’s a policy that more than pays for itself. The IRS investments are expected to raise $124 billion.

The Republican effort to repeal the IRS’s $80 billion funding increase will not move forward in the Democrat-controlled Senate. But the IRS might yet see its funding decline, if the House Republicans negotiate a cut in the budget fights later this year. If that happens, it is bad news for the millions of American households who pay their taxes honestly, and great news for the country’s richest tax evaders. Funding the IRS will shore up an essential government service, making tax filing easier and tax enforcement fairer.