Donald Trump’s “skinny budget” puts the tax man on a diet, and that could put a dent in how much money Uncle Sam collects from individuals and businesses.
While it might be nice to have the (already slim) chance of getting audited even less likely, experts warn that anemic enforcement could have wide-ranging ripple effects on compliance and revenue. Although it’s not a cut of the same magnitude as the 31 percent cut to the EPA, the 14 percent reduction proposed for the IRS in Trump’s budget would necessitate a sharp cutback in enforcement and customer service.
“The IRS is heavily dependent on people… That means cutting some services,” said Roberton Williams, a senior fellow at the Urban Brookings Tax Policy Center.
Billions of Dollars Lost?
“It’s penny-wise and pound-foolish,” said Robert Weinberger, a senior fellow at the Aspen Institute’s Initiative on Financial Security. “They’ll lose billions in revenue in order to save a few hundred million dollars.”
The IRS is one of the few government agencies that pays for itself; for every dollar of funding it receives, it contributes $4 to federal coffers.
Since 2010, the agency’s budget has already been cut 17 percent. The Center for Budget and Policy Priorities found that the number of employees dropped by 14 percent, and enforcement personnel fell by 23 percent.
“This is the undermining of a basic function of government,” said Chuck Marr, director of federal tax policy at the Center.
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Erin Towery, an assistant professor of accounting at the University of Georgia, noted that the IRS’s duties have increased in recent years because the agency is tasked with administering the Affordable Care Act provisions and penalties, a function agents have had to add to their plate even as funding shrank.
“They’re actually giving the IRS more responsibility but they’re cutting their budget,” she said, and with the workforce stretched so thin, the IRS can only go after the most egregious violators. “The problem with that is they’re leaving money on the table,” she said. “It’s going to reduce U.S. government revenues.”
Greenlighting Tax Evasion
The audit rate already is at a historic low, experts point out. “If they cut into that any further, it’s pretty obvious what the impact would be on compliance,” said George Yin, a professor of law and taxation at the University of Virginia.
“If you starve enforcement, basically, you’re giving a gift to wealthy scofflaws, giving a green light to fraudsters and identity thieves,” Weinberger said.
Fewer audits increase the temptation to cheat, Williams said. “A longer-run worry, as people realize that auditing’s not occurring, is there’s less incentive to be complete and accurate in filing your tax returns,” he said. “Over time, that erodes the system and confidence that everybody’s paying their fair share.”
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The agency itself has sounded warnings about its continued ability to catch tax cheats. “We are especially concerned about the effect that the reduction in our workforce has had on audits,” Commissioner John Koskinen told the American Institute of Certified Public Accountants in 2015. “We’re seeing clear evidence of a longstanding decline in revenue coming from audits,” he said.
Between 2005 and 2010, the IRS earned an average of nearly $15 billion a year from audits, but since that time, Koskinen said, the average has fallen to $10.5 billion.
Tax compliance experts say this makes it easier for small businesses, especially ones where most transactions are conducted in cash, to dodge their tax responsibilities. “Businesses that operate in cash don’t pay about 50 percent of the tax liability they owe,” said Leigh Osofsky, an associate professor of law at the University of Miami School of Law.
A Decline in Customer Service
Along with enforcement, less money for the IRS means fewer customer service agents who can answer taxpayer questions or help out in the case of tax-related identity theft, a problem that has been growing in recent years.
According to the National Taxpayer Advocate’s fiscal year 2016 report, “There is no doubt that the deficiencies in taxpayer service are substantially attributable to a lack of resources.” It detailed the millions of taxpayers who were unable to get a response from the IRS when they called or sent letters, and pointed out that taxpayers have to dig into their pockets to pay for help from an accountant because they couldn’t get assistance from the IRS.
The National Taxpayer Advocate argued that this inability of the IRS to serve taxpayers will generate frustration that will eventually have a detrimental effect on compliance, a prediction other tax experts also echo.
“It leads to mistrust and resentment,” Marr said. He added that the effect of a smaller IRS labor pool would be compounded when paired with a massive overhaul of the tax structure that the Trump administration has made a top priority for this year. “One would think if you’re having this massive rewrite of the tax code, you’d be trying to put the IRS back on its feet,” he said.
“It sounds popular to cut the funds of the IRS, but it’s pretty short-sighted, given that they’re serving the role of raising the revenue,” Osofsky said.