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Analysis: The basic problem with Trump's plan to slash the IRS budget

Fiscal Times logo Fiscal Times 3/4/2017 Eric Pianin

A Trump administration proposal to slash the budget of the beleaguered Internal Revenue Service by more than 14 percent next year has further heightened concerns that the new president’s spending and tax cut strategies will drive the deficit to record levels.

Long under assault by Republican lawmakers, the IRS in recent years has been forced to make significant cutbacks in audits and tax compliance operations, fostering widespread tax cheating and major revenue losses for the U.S. Treasury. Last year, the IRS reported a staggering $458 billion average annual difference between taxes that were owed and actually paid – the so-called “tax gap.”

Treasury Secretary Steven Mnuchin testified during his recent Senate confirmation hearings that one of his goals is to beef up the agency’s enforcement division to vastly improve tax collections and help bring down the deficit. Mnuchin and IRS Commissioner John Koskinen have argued that stepped up enforcement efforts would more than pay for themselves, garnering $6 to $7 of additional tax revenue for every $1 spent uncovering tax non-compliance.

Related: IRS Now Pegs Tax Cheating by Americans at $458 Billion Annually

Yet the Office of Management and Budget has proposed slashing the IRS budget by 14.1 percent in fiscal 2018, according to The New York Times. That would bring down the agency’s operating budget to just $9.65 billion – a far cry from the $12.1 billion budget just six years ago.

The IRS is one of many federal agencies and departments that are being targeted for steep cuts next year to help offset the $54 billion of increased spending on the military that President Trump proposed this week. The State Department, the Environmental Protection Agency and scores of social programs have also been targeted for cuts in a budget document prepared by OMB Director Mick Mulvaney.

The IRS budget overall has come down by 17 percent since 2010, according to the Center on Budget and Policy Priorities. That has forced the agency to severely scale back enforcement operations, employee training and badly needed upgrades to information technology systems.

Holding a tax rebate letter from the Internal Revenue Service, U.S. President George W. Bush speaks about the economy during a visit to a small business in Sterling, Virginia March 26, 2006. © REUTERS/Kevin Lamarque Holding a tax rebate letter from the Internal Revenue Service, U.S. President George W. Bush speaks about the economy during a visit to a small business in Sterling, Virginia March 26, 2006.

Throughout that period, the IRS has reduced its staffing by 14 percent, from 94,600 to 81,600. Some of that reduction was warranted, especially as the tax filing system moved rapidly from the antiquated filing of paper tax returns to almost exclusively online or electronic filings.

However, some experts say that steady decline in spending on IRS operations and enforcement over the years has resulted in a serious reduction in customer service, the closing of dozens of walk-in assistance centers, a decline in the number of audits to ferret out tax cheating and a gradual erosion in compliance and public confidence in the tax system. The number of IRS staffers devoted to audits and enforcing the tax law has dropped from more than 50,000 to below 39,000 since 2010, or 22 percent.

New internal data released this week by the IRS Criminal Investigation unit in its annual report  show that the number of individual tax return audits fell in 2016 to the lowest level since 2004.

Dennis J. Ventry Jr., a member of the IRS advisory council and a law professor at the University of California-Davis, told the Times that the agency had already been squeezed dry.

Last year, seven former IRS commissioners wrote a letter to Congress, saying that over the past half century, “none of us has ever witnessed anything like what has happened to the IRS appropriations over the last five years and the impact these appropriations reductions are having on our tax system.”

Alan Cole, an economist with the Tax Foundation, said in an email Friday that even with the advent of automated, computerized tax filings and communications, the IRS still has “too many responsibilities” with a diminished budget, “especially because it has to handle health care and other ancillary objectives.”

Under the Affordable Care Act, the IRS is responsible for determining whether filers have purchased health insurance, as required by law, and process the applications of lower-income Americans for tax credits to help many cover the cost of their premiums. Under an executive order signed by Trump in late January, however, the IRS has scrapped plans to more aggressively enforce the mandate requiring individuals to show that they have purchased health insurance on their tax returns.

Some economists say that OMB’s latest assault on IRS funding must be viewed in the larger context of the president’s overall plan to slash taxes by trillions of dollars over the coming decade, vastly expand funding for national defense and immigration enforcement and other measures likely to drive up a national debt that is fast approaching $20 trillion.

Related: IRS Warns That Scammers Have a New Trick to Get Your W-2 Form

Roberton C. Williams, a fellow at the non-partisan Tax Policy Center, said in an interview Friday that further cuts in IRS operating funds will only speed up the surge in the deficit. 

“The less money you spend on enforcement, the more likely you are to have reduced compliance – and therefore less revenue,” he said. “It feeds on itself. We need the revenue. We have a big budget deficit. If we collected moneys we should be collecting, we would go a long way towards closing that budget deficit. But we’re not doing that.”

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