In this article, Lederman suggests that supporters of progressive taxation use the fight against rising income inequality as a rhetorical tool to help the IRS receive more balanced treatment from Congress.
Copyright 2016 Leandra Lederman.
All rights reserved.
* * * * *
The IRS is in crisis. Its image was badly damaged by accusations, starting in 2013, that it targeted Tea Party and other conservative nonprofit organizations,1 although federal investigations found no criminal activity.2 Over the past six years, the IRS has experienced budget cuts that have prompted cutbacks in service and enforcement and put the agency under tremendous pressure. In 2014, the Internal Revenue Service Advisory Council said, "In IRSAC's view, the IRS is in the midst of an existential funding crisis."3 Yet Congress cut the IRS's budget for 2015 and for 2016 kept its budget below the 2014 level.4 Some in Congress have said that the budget cuts are a punishment.5
Tax collectors generally are not well-liked.6 Accordingly, politicians can score easy political points by bashing the IRS.7 Underfunding may make the IRS more likely to make mistakes, potentially creating a vicious cycle. Yet, a tax collector such as the IRS is essential because it administers our federal tax system, and "taxes are the life blood of government."8 Congress's inadequate funding of the IRS is thus a very serious problem.9
To have adequate funding for the many tasks Congress gives it, the IRS needs congressional support. Of course, some in Congress may always revile the IRS, although collecting the taxes called for by law is a way to reduce the federal deficit. Some may even attack the IRS in an effort to undermine the progressive income tax.10 However, there may be others who support progressive taxation and who could provide greater support to the IRS when it faces the prospect of largely one-sided hearings or punishing budget cuts. This article suggests that supporters of progressive taxation use the fight against rising income inequality as a rhetorical tool to help the IRS get more balanced treatment by Congress.
IRS Budget Cuts and Politicking
In 2010 "Congress really began piling on the acronymic workload: PPACA (the official acronym for Obamacare) and FATCA (the Foreign Account Tax Compliance Act, which required the IRS to start investigating taxpayer foreign bank accounts)."11 In 2011 the press reported that the IRS was auditing five donors of section 501(c)(4) organizations who hadn't paid gift tax on the transfers.12 After Congress inquired whether the audits were politically motivated, although then-Commissioner Douglas Shulman said they were not, the IRS dropped the audits.13 In early 2012 Senate Democrats wrote to Shulman threatening to introduce legislation if the IRS didn't issue guidance restricting excessive political activity by section 501(c)(4) organizations.14 Around the same time, Senate Republicans wrote Shulman to inquire whether the IRS was applying heightened scrutiny to the section 501(c)(4) applications of Tea Party and other conservative groups.15 In 2013 the controversy exploded.16
Congress's approach to the allegations that the IRS mistreated Tea Party and other conservative nonprofits was often quite partisan.17 House Speaker John Boehner, R-Ohio, asked, "Who is going to jail over this scandal?"18 The House Committee on Oversight and Government Reform, then chaired by Rep. Darrell Issa, R-Calif., held particularly contentious hearings.19 Democrats accused Issa of engaging in "witch hunts,"20 and the ranking Democrats on the committee wrote an editorial in The Washington Post stating, "For nearly three months, Republicans have engaged in a sustained and orchestrated campaign to accuse the White House and the Obama administration of using the IRS to target the president's political enemies -- without any evidence to support their claims."21
By June 2013, four committees had held a total of five hearings.22 IRS Commissioner John Koskinen testified in March 2014 that "over the last eight months . . . more than 250 IRS employees have spent nearly 100,000 hours working directly on complying with the [committee] investigations, at a cost of nearly $8 million," in addition to $6 million to $8 million spent on related information technology infrastructure.23
During this period, Congress also cut the IRS's budget, slashing it by more than $1.2 billion between 2010 and 2015.24 The cuts began in 2011, as the following table shows:
IRS Budget IRS Budget
(absolute dollars, (2015 dollars,
Fiscal Year in thousands) in thousands)a
2009 $11,522,598b $12,729,979
2010 $12,146,123c $13,202,286
2011 $12,121,830d $12,772,706
2012 $11,816,696e $12,198,741
2013 $11,198,611f $11,393,782
2014 $11,290,612g $11,304,014
2015 $10,945,000h $10,945,000
2016 $11,235,000i $11,235,000
FOOTNOTES TO TABLE
a Inflation calculations were performed using US
Inflation Calculator, available at
b Treasury, "Budget Documents: FY 2011, Internal Revenue
Service," available at
d Treasury, "FY 2013 Budget Documents, Internal Revenue
Service," available at
https://www.treasury.gov/about/budget-performance/budget-in-brief/Documents/11.%20IRS_508%20-%20passed.pdf, at 1.
f Treasury, "IRS Oversight Board, FY 2015 IRS Budget
Recommendation Special Report," available at
at 19 (fiscal year2013 budget after sequestration).
g> Treasury, "FY 2015 Budget Documents, Treasury 2015
Budget in Brief," available at
h IRS, "Program Summary by Appropriations Account and
Budget Activity," 1 (2015), available at
i See House Appropriations Committee, "FY 2016 Omnibus
-- Financial Services Appropriation," available at
END OF FOOTNOTES TO TABLE
In inflation-adjusted dollars, the IRS's 2016 budget is approximately 19 percent lower than its 2010 budget.25 In fact, in inflation-adjusted dollars, the IRS's budget is similar to that of 1998,26 the year of the Internal Revenue Service Restructuring and Reform Act (RRA '98), which followed theatrical congressional hearings accusing the IRS of massive abuses by its collections agents.27
These cuts have severely hurt the IRS. It offered employee buyouts28 and imposed an "exception-only" hiring freeze29 that resulted in one hire for every five departures.30 Between 2010 and 2014, the IRS reduced frontline enforcement by 9,500 positions, and its total workforce declined by about 13,000 full-time employees.31 The size of the IRS workforce dropped to the lowest it has been since the early 1980s.32
Also, the IRS's per-employee expenditure on training in 2014 was less than 18 percent of what it was in 2010, in constant dollars.33 Operating with a smaller and less-trained workforce may increase the likelihood of errors. Further, the IRS is also struggling with outdated technology34 and combating a wave of identity theft tax refund fraud.35
Not surprisingly, the budget cuts have hurt both the IRS's enforcement and service functions. Regarding enforcement, the cuts have reduced tax collections36 and case closures by revenue officers.37 Following an uptick in enforcement during the 2009 through 2011 fiscal years, enforcement statistics have been declining as well.38 Enforcement statistics are below where they were in the mid-1990s, before the RRA '98.39
Current audit rates are low and are generally declining. For example, the 2014 overall audit rate for individuals was only 0.86 percent.40 That number is both low as an absolute matter (less than a 1 percent chance an erroneous return will even be examined41) and in comparison to the individual audit rate historically. Before IRS reform in 1998, the individual audit rate was above 1 percent, and it was closer to 2 percent in 1995 and 1996.42 Similarly, the IRS audited only 1.3 percent of all C corporation returns in 2014 but 2.67 percent in 1997.43 Further, in 2015, the IRS announced that because of budget constraints, it was winding down the coordinated industry case program, under which large multinational companies were under continuous audit, and would institute more streamlined audits.44
Regarding taxpayer service, the Treasury Inspector General for Tax Administration reported that the budget cuts have reduced IRS service to taxpayers.45 The IRS's telephone response rate had plummeted,46 and in 2013, because of the IRS's shrinking resources, the IRS decided that its telephone assistors and employees at Taxpayer Assistance Centers (TACs) would only answer "basic" tax questions and would not answer any tax questions after April 15.47
The IRS has also reduced the number of TACs48 and has reduced staff at those sites.49 In 2013, the IRS stopped preparing tax returns at TAC sites.50 Previously, TAC employees would prepare returns for people seeking assistance, who generally were low-income, disabled, or elderly.51
Together, these figures reflect a substantial decline in services the IRS offers taxpayers. Although a wide range of taxpayers may feel the effects on IRS services of the reduction in its workforce,52 cuts in IRS services may have a greater effect on those who face barriers to preparing their returns and communicating with the IRS other than in person53 or who lack the resources to obtain tax assistance elsewhere.54
Reduced enforcement of the tax laws also has perverse effects. First, fraudsters benefit more than those who are trying to comply. Second, income not subject to information reporting (as wages, interest, and dividends are) has a much higher rate of noncompliance, which benefits those who receive nontransparent forms of income.55 Third, higher-income and wealthier taxpayers, including corporate taxpayers, have more ability to enter into potentially abusive tax shelters. Finally, those with more tax liability to evade -- generally higher-income taxpayers -- benefit more.
In 2005, the United States rose to among the highest levels of income inequality in developed countries.56 Economists Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez have shown that the concentration of income and wealth at the very top of those distributions is increasing.57 A progressive tax system, such as the U.S. federal tax system,58 can help reduce income inequality.59 However, if the tax laws are not adequately enforced, the net effect of a progressive tax system may be to increase income inequality.60 This alone should be enough reason for some politicians to support a vigorous IRS.
The IRS is going through a difficult period, in large part because of budget cuts, but also because of inflammatory congressional hearings. The IRS receives plenty of oversight, but it lacks vocal defenders, particularly in Congress. No one should encourage mismanagement or wrongdoing, but voices calling for a balanced look or a bipartisan analysis of IRS issues would benefit tax administration. Congressional supporters of progressive taxation should therefore reframe partisan attacks on the IRS as potentially increasing this country's already high levels of income inequality.
1 See Federalist Staff, "DOJ: Lois Lerner Won't Get Charged for Targeting Conservative Groups," Federalist.com, Oct. 23, 2015, available at http://thefederalist.com/2015/10/23/doj-lois-lerner-wont-get-charged-for-targeting-conservative-groups/.
2 See Devlin Barrett, "Criminal Charges Not Expected in IRS Probe," The Wall Street Journal, Jan. 13, 2014, available at http://www.wsj.com/articles/SB10001424052702303819704579318983271821584 (FBI found only mismanagement, not criminal behavior); and letter from Assistant Attorney General Peter Kadzik to leaders of the House Ways and Means Committee (Oct. 23, 2015) ("We found no evidence that any IRS official acted based on political, discriminatory, corrupt, or other inappropriate motives that would support a criminal prosecution.").
3 IRS, "Internal Revenue Service Advisory Council 2014 Public Report" (Nov. 19, 2014), at 9.
4 The IRS's budget for 2014 was $11.291 billion. See Treasury, "The Budget in Brief (FY 2015)." Its budget for 2015 was $10.945 billion. IRS, "Program Summary by Appropriations Account and Budget Activity" (Feb. 2, 2015). Congress increased the IRS's 2016 budget by $290 million over its 2015 budget, putting the 2016 budget at $11.235 billion. See Consolidated Appropriations Act, 2016, P.L. 114-113, Tit. IV, Div. E, Tit. I, section 113; see also House Appropriations Committee, FY 2016 Omnibus-Financial Services Appropriations.
5 See House Ways and Means majority staff report, "Doing Less With Less: IRS's Spending Decisions Harm Taxpayers" (Apr. 22, 2015) ("As a result of the IRS's blatant misconduct, Congress significantly reduced the agency's budget.").
6 See Samuel D. Brunson, "Watching the Watchers: Preventing I.R.S. Abuse of the Tax System," 14 Fla. Tax Rev. 223, 224-225 (2013) ("Taxpayers dislike and distrust tax collectors. These feelings transcend time and culture.").
7 Ryan J. Donmoyer, "Three Days of Hearings Paint Picture of Troubled IRS," Tax Notes, Sept. 29, 1997, p. 1655, 1658 ("Pollster Frank Luntz . . . observed that 'nothing guarantees more applause and more support than the call to abolish the IRS.'").
8 Matter of Appeal of N.Y. State Realty & Terminal Co., 121 A.2d 21, 24 (1956).
9 The national taxpayer advocate identified insufficient IRS funding as the most serious problem in 2011 and 2014. Taxpayer Advocate Service, "2014 Annual Report to Congress Vol. I" (Jan. 14, 2015); and TAS, "Special Report to Congress, Political Activity and the Rights of Applicants for Tax-Exempt Status" (June 26, 2013).
10 For example, during the 1997 IRS hearings, former Rep. Bob Riley, R-Ala., stated, "The IRS has too much muscle, too much money, and too little oversight. . . . In my view, we should overhaul -- if not eventually abolish -- the IRS. Then we should scrap the Tax Code and replace it with one that is fairer and flatter." 143 Cong. Rec. E2306-2401 (daily ed. Nov. 10, 1997) (remarks of Riley).
11 Bryan Camp, "Overlooked Costs of IRS Budget Cuts Will Hit Taxpayers Hardest," The Conversation, Apr. 14, 2015, available at http://theconversation.com/overlooked-costs-of-irs-budget-cuts-will-hit-taxpayers-hardest-39762.
12 "IRS Formally Ends Gift Tax Probe of 501(c)(4) Contributors," Fed. Taxes Weekly Alert (July 14, 2011), at art. 5.
14 Sen. Charles Schumer press release, "Senate Democrats Urge IRS to Impose Strict Cap on Political Spending by Nonprofit Groups -- Vow Legislation If Agency Doesn't Act" (Mar. 12, 2012), available at http://www.hardhatters.com/images/Franken_Press_Release_and_Letter_March_12_2012.pdf.
15 "New Controversy Over IRS Investigations of 501(c)(4) Organizations and Their Donors," Fed. Taxes Weekly Alert (Mar. 22, 2012), at art. 5.
16 See Treasury Inspector General for Tax Administration, "Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review," 2013-10-053 (May 14, 2013), at i ("The IRS used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions instead of indications of potential political campaign intervention."); and Barrett, supra note 2 and accompanying text.
17 See Tom Cohen, "Partisan Views of IRS Targeting: Political Conspiracy or Overzealous Scrutiny," CNN (June 4, 2013).
18 Sam Stein, "IRS Scandal Hearings Put Inspector General in the Spotlight," Huffington Post, July 17, 2013, available at http://www.huffingtonpost.com/2013/07/17/irs-scandal_n_3611460.html.
19 See Lily Kahng, "The IRS Tea Party Controversy and Administrative Discretion," 99 Cornell L. Rev. 43A n.13 (2013) ("Circus ringmaster Darrell Issa's relentless attacks on the IRS and willful ignorance of any facts that might undermine his witch hunt have been truly impressive.").
20 See Rebekah Metzler, "Democrats Accuse Rep. Darrell Issa of McCarthyism During Panel Vote on Lerner," U.S. News, June 28, 2013, available at http://www.usnews.com/news/articles/2013/06/28/democrats-accuse-rep-darrel-issa-of-mccarthyism-during-panel-vote-on-lerner.
21 Elijah E. Cummings and Sander M. Levin, "Reform the IRS, But Leave Politics Out of It," The Washington Post, Aug. 12, 2013, available at http://www.washingtonpost.com/opinions/reform-the-irs-but-leave-politics-out-of-it/2013/08/12/64c5d36c-0362-11e3-9259-e2aafe5a5f84_story.html.
22 Josh Hicks, "Five and Counting: Yet Another IRS Hearing," The Washington Post, June 4, 2013, available at https://www.washingtonpost.com/news/federal-eye/wp/2013/06/04/five-and-counting-yet-another-irs-hearing.
23 IRS, "Written Testimony of IRS Commissioner John A. Koskinen Before the House Oversight and Government Reform Committee on IRS Operations" (Mar. 26, 2014).
24 TIGTA, "Reduced Budgets and Collection Resources Have Resulted in Declines in Taxpayer Service, Case Closures, and Dollars Collected," 2015-30-035 (May 8, 2015), at 1.
25 TAS, "2015 Annual Report to Congress Vol. I" (2015), at 5 n.7.
26 See IRS, "Written Testimony of IRS Commissioner John A. Koskinen Before the Senate Finance Committee on IRS Budget and Current Operations" (Feb. 3, 2015).
27 See Lederman, "Tax Compliance and the Reformed IRS," 51 Kan. L. Rev. 971, 979 (2003).
28 Id. at 2.
30 See Treasury, "IRS Oversight Board, FY 2015 IRS Budget Recommendation Special Report," available at https://www.treasury.gov/IRSOB/reports/Documents/IRSOB%20FY2015%20Budget%20Report-FINAL.pdf.
31 See TIGTA, supra note 24, at 2.
32 IRS, "Prepared Remarks of John A. Koskinen, Commissioner, Internal Revenue Service, Before the National Press Club" (Mar. 31, 2015).
33 David Cay Johnston, "The Cost of the Shrinking IRS Budget," Tax Notes, June 1, 2015, p. 1043 ("Adjusted to 2014 dollars, the IRS spent $1,926 on training per employee in 2010, but just $339 last year.").
34 See Jeanne Sahadi, "IRS Says It's Using Technology From JFK's Time," CNN Money, Feb. 3, 2015, available at http://money.cnn.com/2015/02/03/pf/taxes/irs-budget-cuts/ (much of the IRS's technology expenditures are still used for upgrades to systems built in the 1950s and 1960s).
35 See IRS, "IRS Intensifies Work on Identity Theft and Refund Fraud; Criminal Investigation Enforcement Actions Underway Across the Nation," IR-2014-50 (Apr. 10, 2014).
36 See TIGTA, supra note 24, at 8.
37 Id. at 13, 16.
38 See IRS, "IRS Data Book," Table 9a (2012) (individual spreadsheets for 1998-2014).
39 See id.; Lederman, "IRS Reform: Politics As Usual?" 7 Colum. Tax J. __ (coming 2016) (reporting statistics that show this comparison).
40 See IRS Data Book, supra note 38 (fiscal 2014 statistic).
41 The low audit rate is not offset by sufficiently high penalties to make gambling on not getting caught economically irrational. See Lederman, "The Interplay Between Norms and Enforcement in Tax Compliance," 64 Ohio St. L.J. 1453, 1457-1460 (2003).
42 See "SOI Tax Stats Archive -- 1863 to 1999 Annual Reports and IRS Data Books" available at https://www.irs.gov/uac/SOI-Tax-Stats-Archive-1863-to-1999-Annual-Reports-and-IRS-Data-Books (Table 11 in each of the 1995 through 1997 Data Books, showing overall individual audit rates for 1995, 1996, and 1997 as 1.67 percent, 1.67 percent, and 1.28 percent, respectively).
43 See id. (Table 11 in the 1997 Data Book); and IRS Data Book, supra note 38 (fiscal 2014 spreadsheet).
44 Eric Kroh, "IRS Division Revamp Will Streamline Large-Business Audits," Law360, Oct. 2, 2015.
45 See TIGTA, supra note 24, at 10.
46 See Government Accountability Office, "Deteriorating Taxpayer Service Underscores Need for a Comprehensive Strategy and Process Efficiencies," GAO-16-151 (Jan 14, 2016), at 11, Figure 3 (reporting 38.1 percent IRS telephone response rate for fiscal 2015). In addition, in fiscal 2015, the average wait time for calls that did get through increased to about 31 minutes, from about 10 minutes in 2010 and under 20 minutes in 2014. Id. at 11, Figure 3.
47 See 2014 Annual Report, supra note 9, at 17 (citing IRS, "Some IRS Assistance and Taxpayer Services Shift to Automated Resources" (Dec. 20, 2013)).
48 Id. at 20 n.68.
49 See GAO, supra note 46, at 16.
50 See 2014 Annual Report, supra note 9, at 21.
51 Id. The number of returns the IRS prepared at these centers had declined over time, dropping from 308,000 during the 2004 filing season to 125,000 in the 2013 filing season, a decline of 59 percent. Id. Those figures do not include returns the IRS prepared after April 15, which amounted to 168,000 returns in 2004. Id.
52 For example, "Tax practitioners are starting to complain that they cannot serve their clients when the IRS lacks enough staff to resolve problems." See Johnston, supra note 33.
53 See 2014 Annual Report, supra note 9, at 22.
54 See Chuck Marr, Joel Friedman, and Brandon DeBot, "IRS Funding Cuts Continue to Compromise Taxpayer Service and Weaken Enforcement," Center on Budget and Policy Priorities (Sept. 30, 2015) ("These cuts threaten low-income and other vulnerable taxpayers in particular.").
55 See IRS, "Tax Gap for Tax Year 2006 Overview" (Jan. 6, 2012) (finding an estimated 1 percent net misreporting percentage on wage and salary income, an 8 percent net misreporting percentage on income subject to substantial information reporting, and a 56 percent net misreporting percentage on income subject to little or no information reporting).
56 See Atkinson, Piketty, and Saez, "Top Incomes in the Long Run of History," 49 J. Econ. Lit. 3, 45, Table 6 (2011); and Leonard E. Burman, "Taxes and Inequality," 66 Tax L. Rev. 563, 566, Figure 2 (2013) (illustrating top income shares of various countries using the Atkinson, Piketty, and Saez data).
57 Atkinson, Piketty, and Saez, supra note 56, at 6-7.
58 Overall the U.S. federal tax system is progressive, with the individual and corporate income taxes particularly so. Burman, supra note 56, at 569, 573.
59 See Denvil Duncan and Klara Sabirianova Peter, "Unequal Inequalities: Do Progressive Taxes Reduce Income Inequality?" IZA Discussion Paper No. 6910, at 3-4, 12-13 (Oct. 2012), available at http://ftp.iza.org/dp6910.pdf. In OECD countries, taxation does about one-fourth of the work in reducing income inequality and transfers do the remainder. OECD, "Income Inequality and Growth: The Role of Taxes and Transfers," OECD Econ. Dept. Policy Notes, No. 9 (Jan. 2012), available at http://www.oecd.org/eco/public-finance/49417295.pdf.
60 Duncan and Peter, supra note 59, at 3-4, 34-35.
END OF FOOTNOTES
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