Have you heard about the “Wait Longer for Your Tax Refund Act of 2023”? What about the “Millionaire Tax Evader Relief” package? If legislation were named honestly, that’s what would be making its way through Congress right now, because once again the IRS is facing budget cuts.
Cutting the IRS is a top Republican priority. It was their first piece of legislative business once they held a majority in the House. It was a central demand of the debt ceiling negotiation that resulted in a $21 billion cut in IRS funding, clawing back part of an $80 billion increase passed by the Democrats when they controlled Congress. And that is not the end of the story; House Republicans are aiming for even more IRS cuts in future budget negotiations.
The IRS needs to be able to help taxpayers pay their taxes. People who want to pay their taxes honestly should be able to rely on the IRS for clear, accessible guidance. A big piece of what the IRS wanted to do with the new funding was to improve customer service, making it easier to reach the agency by phone or in person. For instance, the IRS used some of the increased funding to open new “Taxpayer Assistance Centers.”
The IRS also wanted to modernize its systems so that tax returns could be processed faster, and to allow taxpayers to do more things digitally and online. As has been widely reported, the IRS is also trapped using technology that dates from the late 1990s. There are IRS tech systems that are not just old enough to vote, they are old enough to run for Congress.
The IRS also needs to have the capacity to ensure that all taxpayers follow the law. That means auditing high-income tax filers. Wealthy people can hire expensive lawyers and accountants to reduce their tax liability, and (of course) they also receive most of the income. So it is not surprising that most of the “tax gap” (taxes owed but not paid) comes from those at the top of the income distribution. (ProPublica recently published an eye-opening examination of how wealthy people avoid income taxes through foundations that offer little or no public benefit — like private art museums that are almost never open to visitors.)
If the IRS is going to ensure that rich people obey the tax laws, the agency needs to be able to hire and retain talent. But the IRS has been underfunded since at least the 1980s, and the IRS enforcement budget was cut by nearly a quarter between 2010 and 2021. In recent years, the agency has largely abandoned audits on high earners. The agency once audited 16% of those with incomes over $5 million, but that figure dropped to 2% a few years ago.
That means the IRS is leaving a lot of public money on the table. Audits of the top 0.1% of earners raise six dollars for every dollar spent. Plus, audits deter tax evasion, raising even more revenue over time. Audited taxpayers are more conscientious about their taxes in the following years, a deterrence effect that is, on average, three times larger than the original amount recouped from the audit.
This is why cutting the IRS budget doesn’t save money, it costs money. The Congressional Budget Office conservatively estimated the net budgetary effect of the IRS funding rollback in the debt ceiling negotiation at $900 million. Other estimates, taking account of reduced deterrence, put the price tag in the hundreds of billions.
We still do not know exactly how the IRS will reprioritize its funding, given the vague wording of the cuts agreed to in the debt ceiling negotiation. Particularly with the potential for additional reductions, it will be hard for the agency to plan ahead. But we do know one thing for sure: more of the American people’s money will be staying in the pockets of tax evaders.