IRS budget cuts mean fewer audits, more tax cheating and lost billions
Published 10:00 am Wednesday, April 19, 2017
WASHINGTON — The fear of getting audited by the Internal Revenue Service weighs on the minds of worried taxpayers as this year’s deadline for filing returns ended Tuesday.
But should you be scared your number will come up randomly or because of questions about your return?
Not as much as you might imagine. Several years of budget cuts have reduced the IRS’ ability to conduct audits. And if President Donald Trump’s proposed IRS budget chop of $239 million occurs, the agency’s audit capacity will continue to wither.
The result is taxpayers who cheat on their returns, or even those who miscalculate what they owe, will slip through the IRS net unnoticed.
That may seem like something to cheer, said Mark Luscombe, a New York tax analyst. But, he added, if taxpayers don’t pay what they owe, you’ll have to pay more down the line.
IRS Commissioner John Koskinen has criticized past cutbacks to the agency’s budget as facilitating “tax cuts for tax cheats.” He has not commented on the president’s proposed reduction to the agency’s present $11.2 billion budget.
According to IRS figures, the agency has reduced the number of auditors by 25 percent – from 13,888 to 10,159 – in the past six years due to $900 million in budget cuts over that time.
More than 152 million Americans file tax returns. IRS records show the amount of unpaid taxes recovered from audits has dropped from $16.9 billion in 2010 to $9.93 billion last year.
The IRS audited one of every 90 tax returns, or 1.11 percent of all individual returns, in 2010. Last year, only one out of every 140 filings, or .7 percent, were audited.
The reduced scrutiny has been especially good for millionaires.
In 2010, the IRS audited 12.5 percent of tax returns filed by those making more than $1 million. But last year, their odds of being audited had been slashed by more than a half, to 5.8 percent.
“Essentially,” Commissioner Koskinen has said, “the government is forgoing billions to achieve budget savings of a few hundred million dollars.” He made the comment in a 2015 speech to the non-partisan Tax Policy Center.
Loscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting, said he’s worried tax cheats will scam the system in greater numbers if the IRS is forced to further reduce the number of audits.
If so, the government would lose billions, said Brandon DeBot, former policy advisor to the White House National Economic Council under the Obama administration.
With only about one percent of returns being audited even at its peak, the IRS relies on people being honest, said DeBot, now a federal tax expert at the liberal Center for Budget and Policy Priorities.
The IRS estimates that if just one percent more taxpayers cheat, the cost to the federal treasury would be $30 billion a year.
This figure worries Treasury Secretary Steven Mnuchin. At his Jan. 19 Senate confirmation hearing, he questioned the wisdom of curtailing the enforcement ability of “an agency that collects revenue.”
The White House budget office said in March the IRS can still provide “effective enforcement and administration of tax laws” with less money and more technology. It proposed “diverting resources from antiquated operations that are still reliant on paper-based review in the era of electronic tax filing.”
The IRS is staying out of the fray over Trump’s budget cuts. But agency documents show that it asked the Trump administration in January for a $1 billion funding increase, partially to hire more auditors and update a computer system that uses mostly dated date hardware and software.
The agency, however, has been a favorite target of Republicans for improperly targeting conservative political groups seeking tax exemptions during the Obama administration. Some Republicans on congressional budget committees backed the proposed IRS budget cuts.
““We’ve seen time and time again that the IRS is abusing its power to target Americans based on their beliefs – all funded by your taxpayer dollars,” Rep. Evan Jenkins, R-W.V, a member of the House appropriations committee, said in a statement Tuesday.
Sen. Shelley Moore Capito, R-W.V., chairwoman of the Senate Financial Services Appropriations Subcommittee, said federal agencies “should be looking at ways to improve their practices, and hopefully save taxpayer resources in doing so, while maintaining the ability to provide the necessary services.”
Democrats are critical of the proposed IRS budget reduction. Rep. Niki Tsongas, D-Mass., called a smaller IRS “shortsighted and irresponsible” in a statement Tuesday.
Tsongas and 47 other House Democrats have called for an additional $1.7 billion in funding for the agency.
Contact CNHI Washington reporter Kery Murakami at kmurakami@cnhi.com.