TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, March 3, 2017

NY Times:  Trump's Budget Proposes Deep Cuts In Already Depleted IRS

IRS Logo 2New York Times, Under Trump, an Already Depleted I.R.S. Could Face Deep Cuts:

President Trump has a rocky history with the Internal Revenue Service, which he has complained audits him with unfair ferocity. Now he wants to significantly cut the tax agency’s funding at a time when it has already been bleeding staff and struggling to keep up with a flood of returns ahead of Tax Day.

The plans, revealed this week in documents associated with the White House budget outline, put Mr. Trump at odds with his Treasury secretary, Steven Mnuchin, who has argued that the I.R.S. needs more money and a larger staff.

Another round of cuts, tax experts say, could put one of the few federal departments that pays for itself on life support. “This is an agency that has had every last drop squeezed out of it,” said Dennis J. Ventry Jr., a member of the I.R.S. advisory council and a law professor at the University of California, Davis. “I don’t know how it’s going to sustain itself.”

The White House budget office has proposed a 14.1 percent cut to the I.R.S. for the fiscal year that begins in October, reducing the agency’s budget to $9.65 billion; six years ago, it stood at $12.1 billion ($13.6 billion when adjusted for inflation).

If approved, the cuts would happen when the number of audits is down and customer service complaints are up as a result of the drop in funding. ...

Handicapping the agency with additional budget cuts will make matters worse, experts say, emboldening scofflaws to take their chances against an increasingly toothless tax collector. And as funding continues to fall, honest taxpayers are suffering from a lack of attention. ...

Mr. Koskinen, who declined to be interviewed, has argued forcefully that those who would cut the I.R.S. budget in the name of fiscal conservatism misunderstood the agency’s value. At hearings around Washington, he regularly reminds members of Congress that every dollar of investment in the I.R.S. yields $4 in revenue.

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This article is well done. I have a couple of comments. First, it would not be easy to collect even half the tax gap. It would be interesting to get an estimate of how much additional IRS funding would be needed to achieve this target. Second, the consequence of decreasing audits is not just lost revenue but reduced future compliance, and a change in the distribution of the tax burden. IRS audit activity is not so important for the average taxpayer for whom tax is collected from wages. Where it really counts is for wealthier taxpayers. When IRS audit activity goes down, the working taxpayer gets the short end of the stick because what happens is that wealthier taxpayers get away with paying less tax, which ends up being made up by the average person.

Posted by: Victor Thuronyi | Mar 3, 2017 11:09:44 AM

Why would anyone not cheat on their tax returns with a smaller audit staff. This is the dumbest action a government leader could do. Lets just the "bad dudes" steal from the american public.

Posted by: Sid | Mar 3, 2017 8:26:52 PM

Mr. Thuronyi, In practice, the opposite is true. The more the IRS's budget gets cut, the more it focuses on high-income taxpayers. Unfortunately, this focus tends to be very arbitrary, and I predict of less value revenue wise in the end. Rich folk have the money to fight back.

Posted by: Dale Spradling | Mar 4, 2017 7:31:49 AM

I recall reading somewhere that 80% of taxpayers, personal not business, receive refunds every year. I've always had problems getting my withholdings just right to break even at filing time. Isn't that the best incentive for tax compliance, as it makes audit selection easy anyway?

Posted by: MM | Mar 4, 2017 2:21:14 PM