$80 Billion for this???
There’s a lot to unwrap in the Inflation Reduction Act (let’s call it IRA — sounds frugal, doesn’t it?) passed by the US Senate on Sunday August 7, 2022. One significant component is an $80 billion increase in funding for the IRS –seems like a lot of money right? What would the IRS do with all this new funding? Well, a Congressional Research Service report says the legislation includes $45.7 billion for tax enforcement- in other words — audits and collections.
Let’s do some simple math.
The current annual IRS budget is about $15,000,000,000 per year — that’s $15 Billion ($15B). The $80B figure in the IRA is for ten years of funding, meaning $8B per year. $8B divided by $15B gives us an increase of 52% in funding. The current annual appropriation for Enforcement is $6.6B. Another $4.6B per year is a 69% increase in funding.
So how has the IRS been performing? Not too well, according to the Congressional Research report referenced above.
“The number of unprocessed tax returns at the end of the filing season rose from 7.4 million in 2019 to 35.8 million in 2021 and 13.3 million in 2022. Phone service also suffered. Whereas IRS customer service representatives answered 59% of phone calls they received in 2019, they answered 19% and 18% in 2021 and 2022, respectively.”
If you ran a major division of a public (or private) corporation would your customers tolerate this level of service? Would the Board or Management tolerate this performance? Would the customers and Board of a major Not for Profit accept this performance? This type of performance is only tolerated in the mostly unaccountable world of government appropriations and bureaucracy. And the reward for this unacceptable performance is a 52% increase in funding.
One might be thinking, “oh the customer service functions are understaffed and they are dealing with old legacy computer systems that just can’t handle the volume”. And you would be partially correct. The IRS employment roles have declined 15% since 2010. And your personal tax records are housed on a system that is older than most taxpayers. Yes, the Individual Master File application used by the IRS containing more than one billion taxpayer account records was designed and went into use during the Kennedy administration. More on this another time.
So you might then think this new money would be going to bolster customer support and upgrade systems. There you would be completely wrong — that clearly is not where most of the money is going.
Again, the majority (58%) of this increase in funding is going to enforcement, including the hiring of 87,000 new IRS employees. That sounds like a lot of new agents, right? Well, it’s not all agents, but based on the dollars the bulk of these new hires would be focused on — ENFORECMENT.
How big an increase in employment is this? The IRS currently has about 78,000 employees. Even if you allow for 5% annual attrition, if you add 87,000 employees it will be a net increase of 48,000 employees (about 62%).
The sponsors of the IRA say families earning less than $400,000 will not pay more taxes. That has been challenged by numerous analyses. The sponsors also insist new enforcement efforts (audits) will be focused on “wealthy people and big corporations”. If history is any indicator of future performance, that does not align with the IRS’ own numbers from the 2022 IRS Data Book.
Per the table below, in the fiscal year ended September 30, 2021, the IRS completed a total of 659,012 audits of individual tax returns (that’s 89% of all examination types including corporate, estate, and payroll tax returns). 93% of those audits were on filers reporting less than $200,000 of income. Those audits yielded a total of $8 Billion in Recommended Additional Tax. Only 71% of that total comes from this same group of filers earning less than 200,000. It should be noted that Returns with Earned Income Credit (a refundable credit, subject to much potential fraud by nature) made up about 45% audits of filers making less than $200,000.
This woeful history and collection of facts begs the following questions:
· Why not deploy the existing enforcement resources more effectively on the higher earners with greater potential return on effort (dollars invested)?
· Do we really need this additional investment in enforcement, and will the investment pay off?
· Why should US Taxpayers reward an underperforming agency with a 52% funding increase, rather than demand more accountability and performance with existing resources?
· Should Congress and the Executive Branch commit to a simpler tax code to simplify compliance and enable streamlined operations?
Unfortunately, as things stand today, deep cultural, institutional, and political barriers preclude common sense actions in response to these questions.
