Downsized and under-resourced, the IRS is challenged

By Michael R. Malone

Downsized and under-resourced, the IRS is challenged

By Michael R. Malone
University business and tax law experts outline the factors driving the downsizing of the Internal Revenue Service.

Recent media reports have detailed the downsizing that has compromised the Internal Revenue Service’s stated mission to collect all taxes owed to the government in the most efficient means possible. 

From 2010-17, the IRS workforce was cut by a third, down to 9,510 auditors; those auditors conducted 675,000 fewer audits—down 42 percent—while the amount of uncollected tax debts from “non-filers” ballooned from $482 million to $8.3 billion, according to a ProPublica report. Other reports have noted that corporations and the wealthiest taxpayers—for the same period millionaires were 80 percent less likely to be audited—have benefitted the most from a weakened IRS. 

Frances Hill, professor of law and former director of the University of Miami School of Law's Graduate Program in Taxation from 2001-10, said the trends that have limited the IRS’ enforcement capability ability began decades ago. 

“This began as early as the late 1980s and into the 90s, not because someone decided to cut the IRS, but because of hiring changes in the tax law profession,” Hill explained. “Up to that time, you’d come out of law school and do four or five years in the IRS, but then private law was growing so fast they were able to pay much more.” 

After graduating from law school, Hill worked for a tax specialty boutique firm and was mentored there “by two of the best tax policy mentors in Washington,” she said. 

“In my generation there were some wonderfully skilled people at the IRS, but they retired and haven’t been replaced,” Hill said. “It’s not just the number of people at the IRS and the Department of the Treasury [which oversees IRS], it’s what their skillset is and at the salaries paid in government,” she added. “It’s very hard to attract and keep people skillful enough to, on a regular basis, go toe to toe substantively with the top tax lawyers in the country.” 

Diana Falsetta, an associate professor of accounting in the University of Miami Patti and Allan Herbert Business School, agreed that the efficiency of the agency has been diminished over time, but said the causes are varied and difficult to pinpoint. 

“This has been ongoing, but I can’t guess the cause of the downsizing,” said Falsetta, noting that “there has been retirement—it is an aging group at the IRS—and there are few audits and fewer personnel.” 

The budget cuts, in particular, are cyclical based on congressional budget requirements, according to Falsetta. She compared the cuts to the bureau to the same limitations that individual households face to operate responsibly based on their available resources. 

Yet the IRS is particular among government agencies in that the more efficiently it does its job, the more revenues it generates. 

A May 2020 report by the inspector general of the Department of the Treasury referenced in The Washington Post estimated that the “tax gap”—what the government is owed and what it collects—was $50 billion for the period 2014-2016 alone. ProPublica has estimated that restoring the IRS to its peak resourced years would raise $1 trillion in tax revenues during the next decade. 

A recent New York Times article reported that Humphries County in rural Mississippi—where 75 percent of the citizens are Black, one-third live below the poverty line, and the median income is $28,500—has the highest rate of IRS audits. According to Tax Notes, the five counties with the highest tax rates in the United States are all in the South and predominantly Black. 

Many of the poor residents in these areas benefit from Earned Income Tax Credit, an anti-poverty program that provides cash to the poor. 

According to Falsetta, this program draws special IRS attention because it is prone to fraud, in part because of its incentives. 

“That credit in particular has a high incidence of fraud because people are reporting income just to get the credit,” Falsetta said. “As a perception, it looks like the IRS is targeting low-income taxpayers. The only way for a filer to benefit from this tax credit is to have income, so they will file false income to get the credit.” 

She disputed the assertion, too, that the agency neglects auditing large corporations and noted that the IRS Large Business and International Division exists solely to target that segment of returns. 

“These large companies are audited, and it is pretty much guaranteed every three years,” said Falsetta, adding that in her tax disclosure class she customarily uses the company filings as teaching tools. “Without a doubt, every firm that I pull up all disclose at least one, if not all of the previous three years, are under audit with the IRS.” 

She noted that most accounting graduates are lured by the higher compensation packages that private sector companies and the Big Four accounting firms offer, and additionally that the IRS is challenged by its public image. 

“It’s not just a question of salary—working at the IRS is simply not as appealing, especially when you hear that there are budget cuts and their systems may be antiquated,” Falsetta said. She suggested, however, that those who do go to work for the IRS garner valuable experience that is attractive to private sector firms. 

Both Hill and Falsetta acknowledged the incentives and advantages that exist for the wealthiest individuals and for corporations in terms of tax payment, yet indicated that politics and questions of fairness complicate efforts at tax law reform. 

“Substantive tax is difficult in the sense that a number of provisions are not only lawful—and even desirable—but at the same time they offer opportunities for abuse,” Hill said. 

“Still it’s easy to see and say that our tax law is tilted toward the rich,” she added and referred to the current internal revenue code as “indefensible.” “The 2017 tax act was springtime for special interests that reflected raw politics—lobbyists were camped out in legislative offices editing the text of the final bill,” Hill noted. 

For Falsetta, who teaches and researches on tax compliance, the notion of fairness is relative and complex. 

“For the most part, most people believe that everyone should be paying some portion of tax because we’re all benefiting from services,” she said. “And if you ask anybody if they’re paying their fair share, they’ll probably say ‘yes.’ 

“Yet when you look relative to other people, it’s hard to compare the same income, the same type of person, and higher income or lower income,” she said, while noting that the tax system is set up to be progressive: The higher income you have, the higher the tax rate, and those with higher incomes are paying a larger share.”

For Falsetta, the most needed reform for the IRS is in terms of education. 

“Educating taxpayers of all types is critical,” she said. “The low-income, so they can benefit from programs that are out there that they can qualify for, and for others who think that there’s a lot of cheating going on or who don’t think that people are paying their fair share of taxes.” 

To this end, she pointed to the fact that the IRS website offers a customized receipt for taxpayers that shows where their government dollars are allocated—military spending, health care, education, space research, etc. 

“Educating taxpayers about where their dollars go helps increase compliance so they’re less likely to cheat or feel like the government is wasting their money,” Falsetta explained. 

Hill suggested that the IRS situation is far more dire and that attitudes need to shift at many levels. 

“It’s not just a matter of hiring more people, although the IRS needs more people. It’s a matter of hiring the right people, for the right roles, with the right skillset,” Hill said. “And it’s about the political will to understand that tax is a civic responsibility for all of us,” she added.   

“We ought to just get comfortable with the idea that we help each other as Americans by paying our fair share of taxes, and we should spend more time looking at how the federal tax money is deployed around our country.”