Taxes

Rolling Back IRS Funds Would Make It Harder To File Tax Returns And Easier To Cheat

Once they finally pick a Speaker, the very first bill House Republicans will adopt likely would make it harder for the IRS to help taxpayers file their returns and easier for tax dodgers to cheat. It doesn’t seem like very smart branding, but what do I know?

Of course, that’s not how the House GOP is framing its coming vote to reverse nearly all of the 2021 Inflation Reduction Act’s (IRA) $80 billion increase in the IRS budget over the next decade. The House GOP says it is trying to prevent 87,000 armed IRS agents from harassing innocent taxpayers. While this oft-repeated claim resonates among some on the political right, it has little connection to reality.

One draft House GOP bill would eliminate about 90% of the new funding, all but $8 billion that would go to programs formally labeled systems modernization and taxpayer services. While that could preserve some spending directly aimed at improving tax filing, it still would cut funding for initiatives that would indirectly support taxpayers, such as improved IRS information technology.

How would the IRS spend the money?

The IRA outlined where the new money must go, though it didn’t specify exactly how each dollar must be spent. For that, we must await a detailed IRS plan due next month.

Still, we know quite a lot. Of the nearly $80 billion in new money, about $46 billion will go to enforcement. Some will be used to hire more examiners but part of the money could be used improve technology that could reduce the chances that taxpayers get caught in needless and burdensome audits.

While it isn’t in the law, the Biden Treasury Department put its own constraints on how that enforcement money will be spent. Most important, it barred the agency from using the new funds to increase audit rates for small businesses or households making less than $400,000 annually, “relative to historic levels,” whatever that means.

The second biggest chunk of money, about $25 billion, will go to IRS operations. That’s everything from rent to postage (the IRS sends out a lot of mail). Some could improve the agency’s outdated information technology, and increase research and independent oversight — all of which also could help honest taxpayers.

Nearly $5 billion will be used for business systems modernization. That may include improved customer service technology, such as creating an automated callback system for those of us stuck on hold for hours.

About $3 billion is earmarked directly for taxpayer services, including hiring more people to answer those phones and process returns.

The benefits of new spending

Let’s face it, the IRS almost certainly won’t spend the new money in the most productive way. No organization, public or private, does and the IRS is no paragon of administrative efficiency.

But the extra funding surely has the potential to help. For instance, the IRS will have significantly more money to better audit complex returns of partnerships, corporations, and high-income households. As we’ve learned from the release of former President Donald Trump’s tax returns, the agency struggles mightily to examine complicated business returns.

As of September 2021, the agency had audited fewer than 1% of 2017 partnership returns and a bit more than half of the largest corporate returns, one-third fewer than of 2010 returns. Better enforcement can help reduce the gap between taxes owed and taxes paid, and lower the budget deficit.

Odd politics

There surely is room for disagreement over IRS priorities. And there is a serious need for strong, responsible congressional oversight as the agency spends the new money.

Last September, senior Senate Finance Committee Republican Mike Crapo of Idaho and a dozen GOP colleagues laid out their goals for the agency, including better taxpayer service and privacy protections. But, importantly, they didn’t vow to repeal the new funding and avoided absurd claims of armed agents battering down the doors of honest taxpayers.

Republicans won control of the House in 2022 because they were able to flip a handful of seats in swing districts. But they couldn’t beat endangered Democrats in other districts and failed to win back the Senate—because independents largely stuck with Democratic incumbents.

Surveys suggest one reason was voter displeasure with what many saw as extremist candidate views. And for years, public opinion polls have shown a majority of Americans believe the rich and corporations fail to pay their fair share in taxes. They want to see more IRS audits of those returns, not less.

In terms of short-run policy, the House vote will change nothing since the bill will die in the Senate. However, it is possible that come the inevitable end-of-year scramble over the budget next fall, Democrats will concede some IRS funding.

The upcoming vote may help motivate hardcore GOP voters in solid red districts. But making your first priority legislation to make life harder for ordinary taxpayers and easier for tax cheats doesn’t seem an especially effective way to win over swing voters.

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