Honey, I shrank the IRS

The administration wants more money for tax-law enforcement. Let's ask why

Last week, we pointed to a piece of news that we have yet to read or hear from most major news organizations: The federal budget deficit is going to take a hit, because Congress included the government’s fundraising arm, the Internal Revenue Service, in the sequester.

Put in proper context, meanwhile, that story is a bigger deal than just a sequester tale. Adjusted for inflation and population growth, Congress has cut the IRS budget 17% since 2002, context that no major news organization has reported, as far as I can tell. Such cuts have real impact, as we shall see.

Moreover, news hooks to this are all over the place. Last Thursday, Treasury Secretary Jacob Lew told House members (the Committee On Appropriations Subcommittee On Financial Services And General Government) that the president wants “a $1 billion increase” for the IRS budget, “of which $412 million is to maintain the integrity of tax law enforcement” through “initiatives that provide a high return on investment.” In plain English, that refers to the budget for tax detectives to ferret out cheats.

Hardly anyone picked up on this. Searching in the Nexis major newspapers file and in Factiva since last Thursday and I could not find any coverage in major newspapers or on the three television network evening news programs. Patrick Temple-West of Reuters reported that “the head of the Internal Revenue Service cautioned on Thursday that tax collections will suffer from budget cuts imposed on the agency by Congress.” Dow Jones also ran a brief piece, by Jeffrey Sparshott, which said the furloughs of IRS personnel will result in “poorer service and lower revenue collection.”

Among regional outlets, the Baton Rouge Advocate had a piece keyed to a local congressman’s complaint about how the “IRS is seeking to increase its budget by more than $1 billion to a total of about $13 billion.” (It’s worth noting that the president is seeking the $1.6 billion increase, not the agency.)

What’s missing from everywhere, including these meager offerings, is the Why?—the rationale for increasing the budget of the IRS. That is where the story lies. In fact, the increased spending that President Obama has asked for would reduce a major disparity in how the tax laws are enforced—efficiently and effectively for wage earners, but inefficiently and ineffectively for the self-employed, business owners, landlords, and other non-wage income earners.

The 151 million Americans who have paycheck jobs see their federal income and payroll taxes deducted before they are paid, in a largely automated system that verifies what individuals report on their tax returns with data from employers. Meanwhile, business owners, freelancers, landlords, and some investors all self-report—with little to no verification of income.

The possibility of an audit is one reason to self-report honestly. And, like wage earners, the people that Congress trusts to fully report their income are subject to audits. But Congress has reduced spending on audits, reducing both the number of them and their quality.

That is a subtle favor to non-wage earners who choose to shortchange the government, because their odds of getting caught are small and shrinking. Studies in Minnesota, Denmark and elsewhere have found that while nearly every bit of verified income is reported, but as much as 37 percent of unverified income is not.

IRS audit data, analyzed at The Transactional Records Access Clearinghouse (TRAC),
a respected resource on government staffing, spending, and enforcement, shows a severe drop in audits just since Fiscal 2011. The latest TRAC report on the IRS includes data through the end of January. (Professor Sue Long, a co-founder of TRAC, gets monthly reports from the IRS under a federal court order.)

So what’s the upshot? These IRS cutbacks put a burden on the rest of us, the taxpayers who do pay their fair share. The federal deficit has been shrinking, but it could shrink faster with better tax collection.

Here’s a resource: For useful and easy to understand information about the impact of cuts to the IRS, go to a new report by Citizens for Tax Justice, or CTJ, titled “Do The Math: Sequester Cuts to IRS Increase the Deficit.” CTJ, which focuses on how the tax system favors the wealthy and politically connected, has an impeccable reputation for precision and reliability in its calculations.

Its new report begins with this sourced observation:

Let’s start with the facts. Every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200. Here’s another metric. Every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back. Can you say “return on investment?”

A bit of this kind of information and background would help readers connect the dots in sequester and deficit stories. For example, a Monday piece in The Washington Post, about the rising cost of disaster relief, which notes that such spending is deficit spending. A line on the IRS cuts wouldn’t have hurt.

Or a Sunday Detroit Free Press story about a nonprofit credit union that is making “furlough loans” to government employees affected by the sequester—51 such loans so far, through Wednesday. The piece made a passing mention of the plan to furlough all IRS employees for five or more days this year, but not of how that furlough (and other IRS cuts) affects the federal budget deficit. Perhaps an opportunity missed.

Here some numbers for journalists to keep in mind:

* IRS revenue officers, otherwise known as tax collectors, earn an average salary of $50,485, while bringing in $2.5 million each per year.

* IRS auditors who examine individual tax returns, earn on average $75,577, and on average annually find more than $1 million of taxes due.

* IRS auditors working on the biggest corporations, who make nearly $150,000, identify on average $19 million in extra taxes per year. That’s $126 for each dollar of pay, an extraordinary return for the cost.

Where are the Page One stories about government returns on investment that would make Wall Street drool?

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David Cay Johnston covers fiscal and budget matters for CJR’s United States Project. He is a reporter with 46 years of experience, including 13 at The New York Times; a columnist for Tax Analysts; teaches tax and regulatory law at Syracuse University Law School; and is president of Investigative Reporters & Editors (IRE). Follow him on Twitter @DavidCayJ. Tags: , , , ,