The IRS has been shouting hoarse about the lack of funding for years. Due to cuts in funding, the agency had to shrink many of its services. But there’s another big loss happening: a research study from Indiana University Kelley School of Business has revealed that budget cuts at the IRS have lead to the loss of billions of dollars in tax revenue from corporations. The IRS could not collect the tax money it normally could from companies because it did not have the funds to enforce tax laws. 

The research study used confidential IRS audit data from tax return years 2000 through 2010 of large corporations. It found that the IRS could have collected $34.3 billion in revenue from these firms alone if they had additional funding of $13.7 billion. 

Along with poor customer service and archaic equipment, lack of agents and staff at the IRS is making the Treasury lose billions of dollars in revenue each year. Responding to the IRS’s problems with funding and its deteriorating services, steps to modernize it are being considered. But will they work? Bloomberg shares: 

The House of Representatives has approved bipartisan legislation to modernize the Internal Revenue Service, but proposes to do this without providing new funding. As a result, the plan is sure to fail. The agency needs to hire and train auditors and other officials, replace ancient IT systems, and improve customer service. All this comes at a cost. 

The agency’s budgets and payrolls have been declining since 2010 when Republicans deliberately started gutting the agency. In 2017 the number of auditors dropped to fewer than 10,000 for the first time since the mid-1950s. In turn, the proportion of returns subject to audit dropped to just 0.6 percent, the lowest in 15 years. And things are only going to get worse: As many as 40 percent of IRS employees could retire this year. 

A failing IRS is a bigger problem than you might suppose. Most Americans feel obligated to pay their taxes, but lax enforcement starts to erode that sense of obligation if cheating is seen to work. This calls the legitimacy of public finance into doubt. Adding to the IRS budget is fiscally smart, as well, since every additional dollar spent on the agency generates at least $4 in revenue. For lack of resources, an estimated $400 billion is owed but unpaid. 

Investment in new IT systems is needed to guard against cyberattacks and protect taxpayers’ information. The current computing system is the oldest in the federal government and dates to the Eisenhower administration. Among other things, this makes interacting with the agency a nightmare: The agency has 60 different databases, and when taxpayers call, officials have virtually no way of knowing their prior history. Just ahead of last year’s filing deadline, the computers crashed. The IRS’s taxpayer advocate has compared the agency’s system to a 50-story office building on top of a creaky, 60-year-old foundation, and it is adding a few more floors every year.’ 

As well as more money, audit priorities should be adjusted to generate more revenue. Right now, workers focus on easy cases – such as low-income families who may be erroneously claiming the Earned Income Tax Credit. Instead, the IRS should target pass-through entities, for instance, which are among the least audited and the most likely to be claiming questionable expenses or using tax-avoidance schemes. (The 2017 tax law gave new benefits to pass-throughs, making this problem worse.) An effective oversight board is needed, too.

The IRS’ woes have continued for long periods of time. After the tax changes, IRS adjustments might be the next big thing in the tax circuit. Will the IRS get additional funding it desperately needs? Or will it face changes it can’t support? How the IRS will fare will be revealed in the coming months.” 

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