The IRS lacks the workforce and infrastructure to pursue high-value tax enforcement, but this resource problem also reinforces to the IRS workforce and to Congress that low-value tax enforcement is the greater problem in what Chad Hooper, executive director of the Professional Managers Association, calls a “self-fulfilling prophecy.”
“The IRS’s embedded culture has become to focus these examinations on easier and less complex returns, and that does mean lower- or middle-income earners, rather than wealthier individuals,” Hooper said in a July 14 briefing on the proposed IRS budget hosting by his organization. “That culture is reinforced by congressional action and inquiry because we see that play out in the way that Congress talks about the earned income tax credit and mitigating improper payments for these lucrative social safety net programs.
“That leads the IRS to prioritize a very rigid enforcement across that population of taxpayers. But it’s a zero-sum game. If we’re doing that, then that means those funds are not being spent on more financially complex investigations, which may be longer term, they may require more staff and a lot more expertise to come to a conclusion.”
The lack of resources at the IRS has long been a problem for the agency, but it has recently entered the spotlight following Biden administration proposals to increase agency funding in both a proposed infrastructure bill and in annual budget legislation.
In the past decade, the IRS budget declined by about 20 percent, and the agency has more than 20,000 fewer employees than in 2010.
IRS Commissioner Charles Rettig characterized the situation as his workforce being simply “outgunned” in the fight to combat tax evasion and fraud.
Rebuilding that workforce will also be a long effort, as Hooper said that even the hourly taxpayer assistance employees must effectively know the entire tax code to perform their jobs.
“It took 3.5 years for me to complete my training program,” said Hooper, who worked at the IRS for over five years. “The IRS training apparatus works really hard with almost no resources to give everyone the knowledge they need to be successful. But it will take time for that investment to pay dividends because it does take several years for someone to skill up to the level they would need to be at in order to audit the complex, very large corporations.”
Couple that with a taxpayer database that is about to celebrate its 60th anniversary and lacks modern machine-learning and integration capabilities, and the IRS is at a significant disadvantage in addressing the enforcement gap between low- and high-income taxpayers.
Hooper noted that the highest-income taxpayers — who offer the highest return on investment for IRS auditing — often file tax returns that are thousands of pages long, which are difficult to comb through without computer assistance.
The infrastructure legislation as it currently stands would grant the IRS $40 billion over several years to improve its capabilities, half of what President Joe Biden requested for the agency. That $40 billion is still expected to yield $103 billion in revenue for the government, a net gain of $63 billion, according to the Congressional Budget Office.
Hooper said that revenue gain would be enough to buy the government six moon bases.
The fiscal 2022 funding legislation currently under consideration in the House would also grant the IRS $13.6 billion next year, nearly $2 billion more than its budget in 2021.
“That bill really doesn’t provide the IRS resources to make significant improvements, and when we adjust for inflation, that appropriation is actually $1.5 billion fewer than the agency received in 2010,” Hooper said. “We still were not funded appropriately to do what we needed to do, even at that level.”
This problem is further exacerbated by a Congress that not only tends to fund agencies on a year-to-year basis — a system that has hindered several agencies’ efforts to conduct long-term planning — but also by legislators that are only inclined to continuously give money to programs that have demonstrated early results.
For example, the Technology Modernization Fund was granted $100 million in 2018 to provide loans to federal agencies looking to modernize their IT operations. Senators considering FY19 appropriations pushed back against giving the fund additional money because they had “not seen results from that program yet,” despite the fact that the modernization plans and repayment schedules for the TMF were often designed as multiyear efforts.
If the IRS needs to spend long periods training new employees and invest in a new database that gives them more thorough insight into taxpayer behavior — as well as spend years in investigations and legal battles with the highest-earning and best-resourced taxpayers — Congress could lose patience for investing in such a system, even if it does eventually yield more government income. And Hooper noted that a continuing resolution, which sets agency funding at previous levels until Congress can agree to new budget legislation, would be “fatal” to IRS workforce efforts.
The agency could rehire retired employees to temporarily fill the skills gaps, as is done at other agencies, such as the Architect of the Capitol.
“Being able to do that, and to do that in a way that doesn’t negatively impact the retiree’s annuity, I think would certainly be a way to help,” Hooper said.
“Should we bother those civil servants who have already given so much of their time, because Congress can’t fund us appropriately? I think that ethically that’s an interesting question to mull over.”