I.R.S. Advisory Council Says Tax Compliance Likely to Collapse

The IRS Advisory Council has issued its latest public report. It adds to the chorus of IRS oversight bodies raising the alarm about the effects of reduced budgets at the agency. Excerpts:

[F]unding for the IRS has decreased about 20 percent on an inflation-adjusted basis , and is now below levels. These reductions largely do not include the effects of the unfunded mandates of significant program costs, like [Obamacare and the 2017 tax reform law]… Over the past several years, the IRS’s workload and responsibilities increased even as staffing levels declined. For example, , the total number of returns filed increased by nine percent. The number of IRS employees is down by more than one-third from past staffing levels, primarily in compliance and enforcement… In , the IRS audited 0.6 percent of all individual returns filed, compared to 1.1 percent in , a drop of approximately 50 percent. In , the IRS audited 2.5 percent of all business returns (assets greater than $10 million) filed, compared to 5.7 percent in , a drop of more than 50 percent. Meanwhile, cybersecurity and identity theft refund fraud prevention programs consume a larger share of the budget.

The implications of this, according to the report:

The degraded service and enforcement functions may adversely affect the voluntary compliance of many taxpayers. Our tax system is one of self-assessment. The cost of collecting the taxes imposed by the government to enable funding of government programs is orders of magnitude less than it would have to be if taxpayers did not themselves voluntarily assess and collect those taxes. We are on a slippery slope in that once taxpayers lose confidence in the present system, that voluntary compliance may significantly erode.

[W]hile much of the lower collections [from enforcement underfunding] will be attributable to the relatively small percentage of taxpayers who have traditionally ignored their responsibilities, a growing amount may be attributable to the effects of increasing cynicism of taxpayers about the fairness and integrity of the tax system. Thus, previously honest and diligent taxpayers who would otherwise end up paying more to subsidize noncompliance by others could themselves be tempted toward noncompliance.

It’s amusing to read reports from the Government Accountability Office, the IRS Oversight Board, the National Taxpayer Advocate, the Treasury Inspector General for Tax Administration, and now the IRS Advisory Council, all basically singing the same tune. The government can afford five redundant oversight agencies but can’t keep its tax collection department from collapsing from lack of funding. Maybe a sixth would help.