Why the IRS Can't Do Its Job

The Office of the Taxpayer Advocate was established in the 1996 by Republicans in Congress who wanted a watchdog within the IRS that would look out for ordinary taxpayers.

So it is interesting to hear what the current Taxpayer Advocate, a woman named Nina Olson, has to say about how today's Congress is treating taxpayers.

Olson just reported her latest annual report, and it has blistering words for the budget problems facing the agency, courtesy of Republicans in Congress. Olson paints a picture of an agency in crisis, with dire consequences for ordinary filers:

The most serious problem facing U.S. taxpayers is the combination of the IRS’s expanding workload and the limited resources available to the IRS to handle it.

Among the consequences:
1. The IRS is unable to adequately meet the service needs of the taxpaying public.
2. The IRS is unable to adequately detect and address noncompliance, requiring honest taxpayers to shoulder a disproportionately large share of the tax burden.
3. The IRS is unable to maximize revenue collection, contributing to the federal budget deficit.

The report offers up lots of details to support these points. For instance, Olson estimates the average honest taxpayer pays a "surtax" of $2,680 to subsidize all the tax cheats -- an estimate made before the release of the IRS latest analysis of how much money the U.S. Treasury loses to tax evasion -- $385 billion in 2006.

Olson's writes that shortchanging the IRS with budget cuts just doesn't make sense:

more funding for the IRS means more federal revenue. The IRS is effectively the Accounts Receivable Department of the federal government. It collects more than 90 percent of all federal revenue and therefore provides the funds that make virtually all other federal spending possible. On a budget of about $12.1 billion, the IRS collected about $2.42 trillion in FY2011. In other words, for every $1 that Congress appropriated for the IRS, the IRS collected about $200 in return. . . .

Rather than recognizing the IRS’s unique role as the revenue engine for the federal government, however, the congressional budget rules treat spending for the IRS exactly the same way they treat spending for all other federal agencies — a dollar spent is simply a dollar spent, with no consideration given to how many dollars the IRS will raise in return. If the federal government were a private company, its management would fund the Accounts Receivable Department at a level that it believed would maximize the company’s bottom line.

Former IRS Commissioner Charles Rossotti has written:

When I talked to business friends about my job at the IRS, they were always surprised when I said that the most intractable part of the job, by far, was dealing with the IRS budget. The reaction was usually “Why should that be a problem? If you need a little money to bring in a lot of money, why wouldn’t you be able to get it?”

Good question, of course. And the real answer is too weird for anyone from the practical world of business to grasp -- which is that Republicans in Congress hate government so much that they are ready to cut the IRS budget on principle despite clear evidence that such cuts will actually increase the budget deficit.

So what would things look like in an ideal world? Olson offers an answer:

the National Taxpayer Advocate recommends that Congress develop new budget procedures to ensure that the IRS is funded at whatever level will enable the IRS to meet taxpayer needs and maximize tax compliance, with due regard for protecting taxpayer rights and minimizing taxpayer burden. In the short run, this approach should include carving out the IRS from discretionary budget freezes intended to reduce the budget deficit, as cuts to the IRS budget are likely to increase the deficit. Over the longer term, the National Taxpayer Advocate recommends that Congress consider exempting the IRS from spending ceilings or even taking the IRS off-budget.

And what are the chances of this happening anytime soon? Exactly zero. And what's really a shame is that conservatives in Congress, supposedly such a great friend to taxpayers, won't be held accountable for thoughtless budget cuts that shortchange taxpayers.