July 29, 2021 at 5:00 am ET
Spending money to collect money usually generates a solid return on investment. But when this idea is being proposed for a powerful and intrusive government agency, like the $80 billion increase in funding for the Internal Revenue Service being proposed by the Biden administration and its allies in Congress, it is cause for great concern.
The most recent bombshell report (more like “bust”) on illegally leaked tax returns of wealthy individuals was intended to reinforce the idea that a crackdown on rich tax cheats would yield billions in pain-free revenues, but decades of IRS wastefulness, abuse and mismanagement suggest that this will never happen.
For one, bureaucracies always promise pots of gold at the end of a rainbow, but there are no leprechauns in Washington. While the IRS’ 2019 projection of a $381 billion gap in federal taxes owed versus federal taxes collected may be outdated, subsequent guesses of $1 trillion or more from IRS Commissioner Charles Rettig (or $700 billion from the White House) are fanciful at best. The Treasury Department attempted to justify a $463 billion windfall from its sweeping proposal to massively expand information reporting on bank customers by assuming “a reduction in the steady state share of the tax gap due to increased voluntary compliance as taxpayers react to increased information reporting; and second, a gradual increase of voluntary compliance that phases in over time.” How this vague statement translates into $463 billion is unexplained.
The IRS has also proven stubbornly resistant to managerial and customer service reforms. With a backlog of nearly 30 million unprocessed returns, and only 1 in 50 callers to the IRS’ hotline getting through to a living, breathing representative, some may attribute problems such as these to the pandemic.
Unfortunately, slow workflows and poor responsiveness have been a hallmark of the IRS for years. No fewer than five major legislative efforts since 1988 have been made to overhaul the IRS, most recently in 2019. The agency’s computer systems are among the oldest in the entire federal government and it has failed to make progress on 227 open recommendations on tax enforcement, which has helped to keep it on the Government Accountability Office’s High-Risk List since 1990.
Under these conditions, simply pouring tens of billions of dollars into the IRS is like dropping a V8 engine into an oxcart. Unfortunately, V8 engine or not, oxcarts have a way of trampling everything in their path. And in the case of the IRS, that includes numerous innocent taxpayers who have seen businesses ruined, and their personal lives turned upside down.
Previous boom cycles of IRS enforcement, promising to target only wealthy deadbeats, resulted in tactics that have been applied across the tax-filing population, including retroactive interpretations of guidance, erosion of due process protections and massive information document requests. Then there was the “Lois Lerner scandal,” when the then-acting director of exempt organizations rejected tax-exempt applications and conducted audits of nonprofit groups based on their conservative-sounding name and purpose.
The estimates of up to $700 billion as the return on investment from increased information reporting plus an IRS budget boost of $80 billion have already been debunked, as even the best IRS enforcement efforts have provided $4.00 for every $1.00 of investment, making the potential return closer to $300 billion. That level of return on investment has only occurred with a fully trained and experienced staff in place. Since it takes up to five years to train IRS agents to conduct audits and enforcement actions, which takes current auditors away from those duties, and the targeted “rich” individuals and corporations have significant resources to challenge audits and delay payments, the $300 billion should be considered overly optimistic. And setting a specific revenue collection target for the IRS is opening the door to the kind of abuses that have occurred far too often in the past.
The IRS and the White House need to come up with a single number for the tax gap and return on budget investment, and other estimating agencies, like the Congressional Budget Office, should scrutinize those calculations. The compliance costs of the $80 billion enforcement initiative must be quantified, with input from affected taxpayers.
Congress should not even consider budgeting more money on a troubled agency like the IRS without such proof of return on investment, better commitments to managerial competence and better respect for citizens’ rights.
In past times when Congress has declared war on what it views as tax noncompliance, it has done so with little knowledge of the battlefield, the wrong weapons and strategy, deficient command and control and poor conservation of resources. The result has been massive collateral damage on taxpayers. It can, and must, be different this time.
Pete Sepp is the president of the National Taxpayers Union. Tom Schatz is the president of Citizens Against Government Waste.
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