The case for more IRS funding

Though the Inflation Reduction Act is enormously popular, some politicians and pundits are trying to generate hysteria about one feature: Funding for the IRS. All the false claims are distracting us from two important things: how necessary the funding increase is to reverse the longstanding underfunding of this critical government agency, and how this funding will directly help average Americans get money owed to them while cracking down on billionaire tax cheats. Bonus: It will generate about $200 billion that we can re-invest in green energy, health care, and a cleaner climate. 

Over the last decade, budget cuts have shrunk IRS staff by 20 percent, leaving the agency with fewer auditors than at any time since World War II. That means they’ve been fundamentally unable to do even the basics of their job, which involves the important task of collecting funding for the whole of government. Unable to process tax returns efficiently, unable to answer calls from confused taxpayers and unable, especially, to get money owed by the extremely wealthy, who have ways of circumventing the IRS.  

Despite what Republican lawmakers would have you believe, most middle-class and poor people pay their taxes, and when there are errors, they are tiny in comparison to the aggressive tax-dodging of the elite. Most Americans have income withheld from every paycheck and they have W-2s that their employer fills out and submits to the Social Security Administration and the IRS. They don’t have convoluted offshore accounts and grantor trusts to invite scrutiny from IRS examiners. 

Not so true of the rich: One recent study concluded that more than one-third of all federal income taxes unpaid are attributable to the top 1 percent. But rich people are simply harder to audit. People who own multiple businesses and have different types of investments that are not reported automatically to the IRS have far more opportunities to hide income.  

Republicans’ cuts to the IRS budget are the reason why the agency has done fewer and fewer of the difficult audits — audits of rich people and big corporations — and focused more on the easier audits, which are audits of poor and middle-income people. From 2010 through 2018, audit rates for those with income between $1 million and $5 million fell by 67 percent. Audits of low-income working people who receive the Earned Income Tax Credit fell by only 40 percent.  

Funding in the Inflation Reduction Act would reverse this dynamic, allowing the IRS to re-hire specialists who know how to go after the complex and convoluted schemes used by the very well-off. Congressional Republicans, it seems, would rather keep the IRS focused on auditing EITC recipients. 

Because this bill is so popular, Republican politicians are making some pretty ludicrous claims in the last few days. So just to be clear: the audits will be focused on wealthy tax cheats and corporate tax evaders, routine audits are done through the mail (not by armed agents as Sen. Chuck Grassley (R-Iowa) hilariously claims), the 87,000 new IRS staff are to be added over a decade (meaning many will simply replace folks who are retiring), and most Americans want billionaires to follow tax law, just like most Americans do. 

In addition to increased enforcement, the new IRS funding would upgrade the agency’s technology and efficiency, helping average Americans get their tax refunds quicker. It’s clear underfunding is a problem: In the last three years alone, the number of unprocessed tax returns nearly doubled, according to the Congressional Research Service. At the same time, the number of calls from taxpayers that IRS agents were able to address dropped to less than 1 in 5 calls answered. Ouch.  

A recent Washington Post article described how the IRS cafeteria filled up with unprocessed paper tax returns that IRS staff were forced to enter by hand into computers running on the COBOL language from the 1960s — a language that coders today don’t even know — because the agency has not been given the funding to invest in contemporary technology. And when the IRS can’t catch wealthy tax evaders, who pays the price? All of us who actually follow the rules and pay what we owe. We are paying for their tax evasion. 

A well-funded IRS is an IRS that goes after the right people — the very wealthy who aren’t paying their fair share of taxes — and protects those of us who are. 

Jon Whiten is a tax policy expert at the Institute on Taxation and Economic Policy