Knee-capping the IRS Is Apparently a Core Republican Value

By Mike Koetting May 9, 2023

The bill that Republicans (by themselves) passed to increase the debt ceiling limit is a basket of pernicious ideas, including cancelling incentives for alternative fuels that was part of the Inflation Reduction Act (IRA), creating incentives to actually increase use of fossil fuel, cancelling student debt relief, and adding “work” requirements for Medicaid. But, even within this legislative rogues’ gallery, there is one that, more than any other, illustrates the disconnect between Republican rhetoric and their true motives. That is the provision to reduce the IRS budget by $71 billion. This is most of the amount of new funding that was included in the IRA to fix recognized problems in that agency.

Background

Across the past few decades, the IRS has been continuously cut, to the point that by many measures it’s the worst-funded major federal department. It’s down to 79,000 workers, a loss of 20,000 employees since 2002 and has about the same number of employees as in 1974, when the US had 120 million fewer people and an economy a quarter of its current size. On top of these cuts, the IRS has been asked to undertake major projects during this period: implement the sweeping 2017 GOP tax code overhaul, support the ACA and create and execute programs to send out three rounds of stimulus checks. Moreover, two-thirds of the existing employees are eligible for retirement.

Source:  IRS Data Book, Table 31

Another consequence of budget starvation, the IRS computer systems—the life-and-breath of an agency that deals with every single American and every single business entity in America—are outdated, overloaded and hanging on by a fingernail. The core system has 60-year old components that are running on COBOL and, one assumes, Band-Aids. The details are actually shocking.

Between staff reduction and system obsolescence, IRS service levels have deteriorated. Millions of returns are unprocessed from previous years. Refunds are delayed indefinitely or disappear into cyberspace. Even if you file electronically, if there is any problem with your return, you might be thrown into paper processing, which is what has happened to many of the unprocessed returns. It is virtually impossible to reach the IRS by phone.

IRS Cafeteria, Austin TX, repurposed for processing.  Washington Post

A specific casualty of the war on the IRS has been auditors. The number of auditors is the lowest it’s been since 1953, when the economy was one-seventh of its current size. The attrition has been greatest among senior auditors who would ordinarily handle the most complex returns. The IRS conducted 675,000 fewer audits in 2017 than it did in 2010, a drop in the audit rate of 42 percent, and it has continued to drop. The consequences are probably even worse than the drop in the number of audits because the remaining auditors are stretched so then, they’re often forced to limit their investigations and move on to the next audit as quickly as they can. This makes audits of the Earned Income Tax Credit more attractive as these audits are fairly straightforward. Audits of these taxpayers, who typically have incomes under $25,000 annually, now account for more than a third of the agency’s audits, while audits of large tax returns have plummeted.

IRS and Deficit Reduction

Given the above, one might wonder how reducing IRS funding winds up in a bill ostensibly about deficit reduction. If you do wonder this, you would not be alone. The non-partisan Congressional Budget Office, for instance, has said these cuts would add roughly $120 billion to the deficit over the coming decade. When pushed, Speaker McCarthy says it is necessary to “protect families and businesses from a weaponized IRS.” I don’t know what exactly he means by this, but the smell is certainly familiar.

Taxes, and the IRS, have never been a happy topic for politicians. But for a long time, there was a grudging consensus that they were a necessary evil. That consensus was buffeted in the Reagan years as he campaigned on cutting taxes and presided over the largest tax cut in history, even if some of it was fairly quickly undone because of the catastrophic effects on the deficit. But the anti-tax notions on which he campaigned stuck around, When Newt Gingrich arrived in the mid-90s, he again puffed up the attack on taxes and the IRS. Audits and overall collections fell precipitously, then climbed up gradually in the first decade of the century. However, Republicans again picked up the attack and, in another budget-standdown, essentially blackmailed the Obama administration into material cuts. Additional cuts have followed.

So, it’s clear that this anti-tax/anti-IRS sentiment is nothing new for Republicans. But one still wonders why, as it daily becomes inescapably obvious that the IRS is struggling to carry out the basic functions involved in raising revenue for the government, Republicans are so insistent on cutting the IRS budget. (The first bill passed by the current session of Congress, on a strict partisan vote, called for rolling back the IRA additions in the IRS. That bill went nowhere, so they have now incorporated the idea into their debt ceiling plan.)

Two, probably related, reasons spring to mind for this focus on undermining the IRS: they want to protect the wealth of their high-end supporters and they want to erode the ability of government to undertake social welfare expenditures.

Protect the Wealthy

The deterioration in IRS resources is a net bonus to the wealthy. For instance, audits of filers with incomes over $5M fell by 88% between 2010 and 2019. Audits for the largest corporations dropped by 54%. Analysis by the IRS from a 2021 report showed that between 2014 and 2016 the number of high income non-filers increased by 50% while 44% of the identified cases were never followed up because of lack of resources. (Three hundred of the most egregious evaders cost the federal government $10 billion in unpaid taxes during this period.)

Research undertaken by the IRS in concert with some academics illustrates the nature of the problem. It shows that non-compliance among high wealth individuals costs the government significant amounts. The large dollar areas of noncompliance are typically quite complex. They require sophisticated accounting and legal work to pull off and countering them would require equally sophisticated auditing techniques. The IRS has been increasingly challenged to bring such sophistication to the table.

Daniel Werfel, new IRS Commissioner, has outlined a plan for the IRS to use the additional money from the IRA. He pledges that all additional audits will be focused on individuals with incomes over $400,000. The Republicans insistence on retracting these funds makes it clear whose interests they consider most important.

Philosophical Antipathy to Government

While in some ways the inclusion of a deficit increasing measure in a bill portrayed as deficit reduction is counterintuitive, it is consistent with the historic perspective of the Republican Party. Over at least the last 40 years it has cared little about the size of the deficit and cared much more about opposing any tendencies of government to provide social support instead of making individuals sink or swim on their own. That this philosophy also resulted in fantastic financial returns for some individuals was probably not coincidental.

Weakening the IRS conceptually fits into this schema not only by straight out protecting the rich, but also by depriving the government of funds—which they would otherwise use to carry out programs that reflect greater social responsibility for fixing various problems, from poverty to education to infrastructure to environment. And, of course, for attacking tax fraud.

There are many pejorative things to be said about this approach, but the one I want to specifically focus on here is that this lack of funding contributes to the sense that government can’t actually fix problems, which in turn is leading to a population-wide cynicism about government. This is the breeding ground for Donald Trump and other populists. It is very unhealthy for democracy.

Lack of funding for the IRS is a poster child. Virtually everyone has to deal with the IRS. No one likes paying taxes, but as the process becomes more miserable it increases the vitriol. And the more people feel the rich are getting away with massive noncompliance, they become even less enthusiastic about paying their own taxes. America’s high level of tax compliance has always been one of the outward signs of a successful democracy. Systematic underfunding the IRS is a good way to undermine that.

In Short

The IRS is not adequately resourced to provide an effective and efficient tax collection service for a country as a large as the U.S. in the 21^st century. The current condition is shameful. Republicans want to make sure it stays that way.

Their “deficit reduction” demands tied to the debt ceiling discussion are no more about reducing the deficit than the Inflation Reduction Act was about reducing inflation. Both do some of those functions, but both are primarily statements of the parties’ respective values. The Republican willingness to continue handicapping the IRS demonstrates their values are about protecting the incomes of the rich and keeping government weak and unpopular. They should be ashamed of themselves. Really.