Six years ago, I wrote a Signal column entitled “We Need to Stop Playing Politics with the IRS.” Although that column was not popular with many readers, it pointed out how IRS funding cuts were hurting taxpayers. Since then matters have gotten worse and the IRS is experiencing significant difficulty functioning.
In last month’s congressional hearings, IRS Commissioner Charles Retig testified that nearly $1 trillion of federal taxes are not collected annually. Treasury Secretary Janet Yellen subsequently testified that uncollected taxes approximated $7 trillion over the past decade. Had those taxes been collected, our national debt would be $7 trillion lower.
But it is not just the government who is hurt by this — I am one of several million taxpayers who cannot get their tax returns processed. My 2019 return was never processed. On that return, I applied my 2019 overpayment against my 2020 tax liability. Because the IRS never applied my overpayment, they erroneously claim I owe them money for 2020.
In 2018, I reviewed a tax return that was prepared by another CPA. As a result of my review, the client filed an amended return claiming a refund exceeding $250,000. Three years later, after an extensive examination of the amended return that concluded the refund was appropriately claimed, the IRS is unable to process the refund payment.
Frequently, businesses need certainty regarding the tax treatment of transactions before they can engage in certain types of commercial activity.
Wall Street and lenders require those businesses to obtain a ruling or pre-filing agreement with the IRS before the transaction can close. Obtaining such agreements has become expensive and time-consuming, resulting in delays that adversely affect commerce.
According to Deputy National Taxpayer Advocate Bridget Roberts, the IRS budget has been cut by 20% over the past decade. Why did this happen?
Whenever Congress passes legislation affecting the federal budget using the reconciliation process, the Congressional Budget Office must analyze each legislative provision to determine its effect on the budget. Congress has gotten good at gaming the system, so there is a strict set of rules to prevent such gamesmanship.
One of those rules provides that, if the IRS gets additional funding, Congress can only consider the cost of funding and must ignore the incremental revenue that will be generated. The paradigm of this approach is that cutting IRS funding is a popular way to save money to pay for other stuff.
Ironically, the CBO issued a report last July indicating that the IRS will raise up to $3 of tax for every additional dollar spent on increasing the IRS budget. Other reports have suggested that the IRS will raise $6 for every additional dollar spent.
Looking beyond the incremental revenue, updating the IRS systems and adding personnel will make it easier for ordinary taxpayers to deal with the IRS. The IRS only answers 29% of the calls it receives from taxpayers.
Furthermore, the IRS is incapable of effectively examining the tax returns of high-wealth individuals and large businesses.
There are no quick fixes. A senior executive in the IRS examination division recently told me that it will take six or seven years for the IRS to rebuild its capacity in the event that IRS funding is restored.
Yet Congress continues to reduce IRS funding. Doing so is popular with the voting public. Since the 1990s, many candidates ran campaigns promising to simply the Internal Revenue Code and abolish the IRS. Those fantasies are appealing to many voters.
In the past quarter-century there were two sets of Congressional hearings whose purpose was to stir up anti-IRS sentiment. Both were political hit jobs.
The first occurred in the late 1990s. Taxpayers testified that they were subject to IRS abuse, leading Congress to enact severe restrictions on the IRS that later allowed corporate tax shelters to proliferate.
The General Accounting Office found no corroborating evidence in a subsequent investigation, and at least one witness subsequently recanted his testimony.
Later, in 2013, Congress investigated the IRS treatment of certain right-wing political organizations who sought tax-exempt status. Those hearings led to significant IRS budget cutbacks. The government agency that oversees the IRS subsequently concluded that the IRS applied the same level of scrutiny to all such applicants regardless of their political persuasion.
Both sets of hearings ultimately resulted in severe adverse consequences to the IRS, trillions of dollars of lost revenue and poor taxpayer service.
Congress can fix these problems, but it is not clear whether the political will to do so exists. If the IRS budget is restored through the reconciliation process, it will be scored by the CBO as a huge cost to the government.
Avoiding the reconciliation process requires 60 votes in the Senate, which is highly unlikely given the Republicans’ anti-IRS political rhetoric.
This is unfortunate, because we need a functioning IRS.
Jim de Bree is a semi-retired CPA who resides in Valencia.