IRS Funding Cuts Encourages Tax Evasion, Fraud, and Poor-Quality Service

By: Robert Bryson

A well-funded IRS discourages fraud, ensures companies compete under the same rules, and provides quality information and service to worried taxpayers. Since 2008, the IRS budget has declined 20% from approximately $14 billion to $11.135 billion.[1] In that time, personnel levels have dropped 20% while the IRS has contended with a 9% increase in tax filings.[2] The reduction in resources and personnel resulted in increased tax evasion and fraud, further depleting government coffers. According to a 2018 study by ProPublica, an estimated $18 billion in tax revenue is lost due to these cuts.[3]

In the United States: You Draft and File Your Tax Return

The United States’ tax system is unique amongst developed countries. Most countries only require businesses to file separate tax returns. Most individuals tax returns are filed by the government and reconciled afterward.[4][5] In the United States, the onus is on individuals. If an individual fails to file a tax return, they forfeit any possible refund.[6] In a country with a well-funded taxing service that is responsive to the population and processes returns timely, the United States system encourages individual responsibility. However, that is not the case. Instead, regular people are victimized by IRS scams, cannot access basic information, and cannot even get a government employee on the phone.

Imagine going to your local DMV. You need to register a new car. Unfortunately, the DMV budget has been cut 20% and there are 20% fewer people working the desks. Can you imagine the stress and the wait? You have to register your car; it’s the law. But the agency tasked with processing your application has been gutted so it takes weeks to process. What do you do? Wait anxiously and hope nothing goes wrong.

Government Mandated Inefficiency

This deadly combination of reduced funding, a gutted bureaucracy, cancelled programs, and the US tax system results in dangerous circumstances during a crisis. For example, millions of people will not receive their stimulus check for months or even until next year.[7] The IRS is unable to answer phone calls and advises people to wait for online updates. [8]

In 2008, American-based oil and gas companies notified the IRS that foreign companies operating in the Gulf of Mexico were not paying US taxes, which allowed them to underbid American companies. In response, the IRS instituted a special program to investigate these foreign companies, which collected more than $50 million from 2008 to 2013. This program was a successful example in how the IRS should work – to ensure a level business environment. However, shortly after the program’s lead retired, it was terminated due to budget cuts.[9]

Moreover, according to a 2019 study by the Brookings Institute, an estimated “one in six dollars owed in federal taxes is not paid” which could equal approximately three-quarters of the entire federal budget deficit.[10] Indeed, according to 2021 FY Treasury Budget, every dollar provided to the IRS increases government revenue by five dollars.[11] Defunding the IRS doesn’t reduce tax rates, it allows those with the resources to avoid paying their duly-owed taxes. Defunding the IRS imbalances the business environment empowering large companies to avoid their tax obligations. Defunding the IRS empowers cheaters.

[1] Treasury Department, “Budget in Brief”, 2019

[2] Snell, Kelsey, “IRS Budget Cuts, Staffing Challenges Create Coronavirus Payment Headaches,” NPR, April 9, 2020

[3] Kiel, Paul and Jesse Eisinger, “How the IRS Was Gutted,” ProPublica and the Atlantic, December 11, 2018

[4] Tax Policy Center, Urban Institute and Brookings Institution, “TAX POLICY CENTER BRIEFING BOOK

How Could We Improve the Federal Tax System?”

[5] See also Gale, William G., and Janet Holtzblatt. 1997. “On the Possibility of a No-Return Tax System.” National Tax Journal 50 (3): 475–85; Holtzblatt, Janet. 2007. “Implications of Return-Free Tax Systems for the Structure of the Individual Income Tax.” Public Finance Analysis 63 (3): 327–49; Van der Heeden, Koenraad. 1994. “The Pay-as-You-Earn Tax on Wages: Options for Developing Countries and Countries in Transition.” Working Paper 94/105. Washington, DC: International Monetary Fund.

[6] Internal Revenue Service, “Don’t Lose Your Refund by Not Filing,” March 19, 2020

[7] See Snell, Kelsey, supra

[8] See Snell, Kelsey, supra

[9] See Kiel, Paul and Jesse Eisinger, supra

[10] Gale, William G., and Aaron Krupkin, “How big is the problem of tax evasion?” Brookings Institute, April 9, 2019

[11] Treasury Department, “FY 2021 Budget

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