Tax Man Losing a Lot of Muscle, U.S. Study Finds

A year-long congressional investigation has disclosed that the much-feared Internal Revenue Service is a pitiful government giant, forced by lack of funds to impose a hiring freeze, unable to modernize its aging computers and even suffering severe shortages of such ordinary office supplies as pens and pencils.

As a result, according to Rep. J. J. Pickle (D-Tex.), the IRS will be able to audit less than 1% of the 100 million individual income tax returns filed this year--a record low--and the nation’s vaunted self-enforcing system of collecting taxes is in jeopardy.

The “tax gap”--the difference between the amount of federal income taxes owed and the amount reported by taxpayers--is reaching $100 billion a year, Pickle said. The IRS’ budget crunch has contributed to its failure to collect more than $60 billion that taxpayers admit they owe.

“It’s obvious the IRS needs more resources to do its job,” said Pickle, chairman of the oversight subcommittee of the House Ways and Means Committee. “While the IRS does the best it can with the resources given, the agency is severely crippled with its current budget.”

An IRS spokesman acknowledged that expenses were being held down by orders to freeze hiring, curtail non-essential travel and eliminate non-essential training.

“We did not cut any money . . . to process tax returns or get out refunds or provide taxpayer assistance, however,” said the spokesman, Wilson Fadely.

The subcommittee acknowledged that about 83% of the tax owed on income from legitimate economic activities is voluntarily reported and paid, a level of compliance that is the envy of most of the industrialized world.

Even so, it said, the “tax gap” between the amount paid and the amount that would be paid if everyone filed a complete and accurate return grew to $87.1 billion in the 1988 tax year and is headed higher.

The IRS has an annual budget this year of $5.2 billion, and 120,000 employees operate out of dozens of offices and service centers. But the agency itself says that is not enough.

Pickle’s subcommittee reported that the IRS went to the White House in the last year of Ronald Reagan’s Administration with a budget request of $6.8 billion. The White House cut the request by $1.6 billion before it was submitted to Congress a year ago, a subcommittee aide said, and the Bush Administration declined to restore any of the difference.

The White House Office of Management and Budget had no comment on that account.

“My private view is that we probably did hold them down too much,” said a senior Administration official who asked not to be named, “but I think they’re going to get well in the new budget.” President Bush is to submit his proposed budget for fiscal year 1991 to Congress on Jan. 29.

The subcommittee said the cuts engineered by the White House for the current year mean that for the first time, the IRS will audit less than 1% of all income tax returns for the 1989 tax year. The IRS audit level, which peaked at about 2.5%, fell gradually to about 1.25% for the 1988 tax year.

In a report on the year-long inquiry, Pickle said the IRS was in a “financial crisis” that has increased the number of errors in official advice given to taxpayers seeking assistance, undercut enforcement and allowed sophisticated tax scofflaws to escape justice.

“The threat to our voluntary tax system is real, and a serious crisis looms around the corner,” Pickle said in a statement. “Under funding the IRS by a single dollar costs this nation at least $10 in badly needed revenue.”

In other criticisms, the subcommittee said:

--Taxpayers calling for IRS assistance on a toll-free telephone line get erroneous information more than 30% of the time.

--Almost $60 billion in taxes owed to the government remains uncollected because the IRS does not have enough funds to pursue delinquent taxpayers. In many cases, no recovery is possible because the statute of limitations has expired.

--IRS programs to modernize its computer systems have been scaled back or delayed because of limited funds. In some cases, costly new computers stand idle because the agency cannot afford to buy software for $100 or less.

--Expert witnesses needed for complex tax trials cannot be hired for lack of funds.

Pickle ordered a series of hearings, starting this month if possible, to explore the growing non-compliance with tax laws and proposed remedies.