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IRS' sequester math: Cut $600M, lose billions

Jul. 21, 2013 - 06:00AM   |  
By JIM McELHATTON   |   Comments
Jack Lew, deputy secretary of State for management and resources testifies before the House appropriations subcommittee on May 13, 2009 in Washington, D.C.
Jack Lew, deputy secretary of State for management and resources testifies before the House appropriations subcommittee on May 13, 2009 in Washington, D.C. (Tom Brown/Staff)

IRS officials say sequestration will save millions, but cost the government billions of dollars in lost revenue.

Internal planning documents released to Federal Times through the Freedom of Information Act detail deep concerns inside IRS about the impact of roughly $600 million in sequester cuts from the agency’s $11 billion-plus budget.

“The IRS expects sequestration to result in billions of dollars in lost revenue due to fewer tax return reviews and diminished fraud detection,” Treasury Department sequestration planning documents state.

“The FY 2013 operating level will result in lower compliance coverage and ultimately in billions of tax dollars going uncollected which, in turn, hurts the integrity and fairness of the entire tax system,” the documents state.

The department has not released any more precise estimates of lost revenue, but Treasury Secretary Jack Lew said in Senate testimony in May that for every dollar spent on IRS enforcement, the agency collects six dollars.

By that measure, the $267 million in cuts to enforcement alone would translate to a revenue loss of more than $1.5 billion due to the sequester.

Rounding out the roughly $600 million in IRS sequester cuts, the budget for taxpayer services was reduced by $113 million; operations support, $199 million; and business modernization, $17 million, records show.

Adding to the revenue losses, some tax cheats could be evading IRS scrutiny. Cuts to the IRS criminal investigations program will likely reduce the number of cases investigators refer to the Justice Department, the records show.

The result: “Some quality cases will likely go unprosecuted,” the documents state, adding that the reduced deterrence effect adds to the reduced IRS revenues in the long term.

Paul Cherecwich Jr., chairman of the independent IRS Oversight Board, said the IRS already has slashed nonpersonnel costs.

“There already have been drastic reductions in contracts and travel,” he said.

Former IRS commissioner Mark Everson, vice chairman of alliantgroup, a tax advisory firm, said in an interview that he is all for the sequester if Congress can’t cut spending. But he said the IRS is different from other federal agencies.

“While in the vast majority of agencies you’re improving the deficit outlook by cutting spending, clearly in the IRS’ case you’re not because monies invested either on the service side or the enforcement side to improve compliance do clearly reduce the deficit, and that’s just a fact,” Everson said.

Everson said the IRS did a good job in preparing for the sequester, but had little choice but to make deep cuts in personnel costs.

“If they don’t hire new people to take calls or, on the enforcement side, launch new audits or make new criminal referrals, everything suffers,” he said.

The Treasury planning documents state that IRS has cut more than 8,000 full-time employees since 2010, while slashing training travel by 68 percent and supplies and materials by nearly one-third.

But with salaries and benefits making up nearly three-fourths of the IRS budget — and more than 90 percent in taxpayer services and enforcement — across-the-board furloughs were unavoidable.

The tax collection agency’s sequester-related troubles largely have been overshadowed by a string of IRS scandals involving conference spending, contracting and its tax exempt division’s handling of nonprofit applications.

Treasury Department officials did not respond to questions about the sequester plans last week, and the IRS declined to comment other than providing a copy of May congressional testimony by former IRS acting Commissioner Steven Miller.

In that testimony, Miller made no mention of the billions of dollars in projected sequester-related revenue losses, but he commented on the difficult budget situation.

“While the IRS will continually be an efficient steward of taxpayer resources, improving and investing in our critical programs under continually reduced funding levels has been difficult,” said Miller, who resigned days later amid reports that the agency’s tax exempt division had targeted conservative political groups for scrutiny.

Last week, Miller’s replacement, acting IRS chief Danny Werfel. announced that an unpaid furlough day scheduled for July 22 had been canceled, though a scheduled fifth furlough day remains set for Aug. 30.

In May, the IRS Oversight Board issued a 22-page report that also raised concerns that IRS cuts were coming at a time when the agency is being asked to do more, including enforcing portions of the Affordable Care Act.

Treasury sequester planning documents predict reduced availability in both pre-filing taxpayer assistance and education services as well as “degraded” telephone service, which concerns Michelle Drumbl, a law professor and director of the tax clinic at Washington & Lee University.

“If people can’t get answers before they file, that could lead to more complications that will cost more time for the IRS to resolve,” she said.

Many of the clients in the law school’s tax clinic are low-income parents who can’t afford to stay on hold on the telephone for an hour or more trying to get a question answered, Drumbl said.

The IRS isn’t the only Treasury component feeling the impact of the sequester.

Planning documents show the department’s Alcohol and Tobacco Tax and Trade Bureau (TTB), which collects more than $23 billion in alcohol, tobacco, firearms and ammunition excise taxes, is deferring “critical IT hardware and laboratory equipment.”

In addition, the bureau processes about 150,000 “certificates of label approval” each year before alcoholic beverage makers or importers can sell in the U.S., but processing times could increase by several weeks, documents show.

Staffing cuts also will hit TTB’s consumer protection programs, including product integrity investigations, records show.

“Reductions in TTB’s regulation and enforcement ... could lead to health and public safety risks,” the documents state.

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