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Why Congress Should Increase the IRS Budget

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"When all is lost," a comic once said, "ask the IRS -- they'll find something." That's easier said than done these days, however, because three in ten people who call the IRS for guidance this tax season will have their questions go unanswered. But, rather than blame the agency, frustrated taxpayers should focus their anger at the real culprit -- Congress.

On Capitol Hill, lawmakers are imposing more demands on the IRS while refusing to provide the resources to ensure that the agency can do its job. The agency then must cut staff, leaving it unable to collect hundreds of billions of dollars a year that taxpayers owe their government.

This "tax gap," now estimated to total $450 billion a year, corrodes public confidence in government, with taxpayers who try their best to comply with the tax laws increasingly feeling as if those who cheat on their taxes are playing them for suckers -- and getting away with it.

How did we get here?

The IRS is unlike any other public agency both in what it does and how it is funded. It depends on a fickle Congress that refuses to set a long-term path for the agency and stick to it. Instead, the IRS in recent decades has lived life on a pendulum, swinging between the goals of law enforcement and of customer service.

When the political winds blow in one direction, with the federal government short of cash and the public demanding action against tax cheats, Congress pressures the IRS to crack down, beef up enforcement, and generate more money for Washington.

That lasts for a few years until we see stories -- real or imagined -- about IRS abuse of taxpayers, high-handed audits, and the like. At that point, Congress steps in and demands that the IRS back off enforcement and beef up its customer service.

Today, the IRS' challenge is even more imposing, with the agency buffeted by a swirl of conflicting political headwinds. In the past year, the IRS took a $300 million budget cut and trimmed 5,000 jobs. At the same time, it regulates and administers an increasingly complex tax code -- one that now features more than 3.8 million words and undergoes hundreds of changes each year that require new paperwork, updated computer systems, revised audit procedures, and lengthy explanations for tax preparers and the public.

Soon, the IRS will face a new challenge -- administering health reform once it takes effect fully. In his 2012 budget, President Obama proposed to increase the IRS's annual budget by approximately $950 million, so that it would total $12.8 billion, in part to ensure that it could administer health reform. But Republicans, who overwhelmingly opposed health reform, led the successful charge to cut IRS funds to $11.8 billion; some Republicans would eliminate the agency altogether.

Scrapping the IRS may sound tempting, especially now that tax season is upon us, but consider this: The IRS collects about $2.5 trillion a year, or an estimated 92 percent of all federal receipts. The agency says that for every dollar it gets from Congress, it generates $200 of federal revenue.

Taxpayers who think that underfunding the IRS budget won't affect them negatively should think again. Staff cuts and the rise in identity theft cases related to tax refunds led the IRS to warn taxpayers earlier this year that it may have to delay refunds. Some early filers have reported delays of a month or longer.

By slashing the IRS budget, Congress has achieved something truly noteworthy -- undermining its own ability to raise revenue and cut the federal deficit. Isn't that a bit like cutting off your nose to spite your face?


Christopher Bergin is President and Publisher of Tax Analysts and an expert on federal tax policy. He has written extensively on federal tax issues for almost 30 years, and he now blogs for Tax.com.