The biggest handout to the rich by Republicans in Congress long has been the systematic gutting of the Internal Revenue Service’s budget—especially its enforcement budget.
That bounty is about to get much bigger, thanks to the tax cut measure passed by the Republican-controlled Congress and signed by President Trump last month. The measure is festive with loopholes, and an overworked and underfunded IRS is already struggling to deal with them.
That’s the warning issued Wednesday by the agency’s national taxpayer advocate, Nina E. Olson, as she issued her office’s annual report to Congress. She cited an IRS estimate that an additional $495 million will be needed in fiscal 2018 and 2019 to implement the new law. That would be roughly a 4.5% increase over the $11-billion budget proposed by Trump for the coming fiscal year.
With more funding, strong leadership, and a closer working relationship with Congress, I am convinced the IRS can do the job well.
The money would go toward “programming and systems updates, answering taxpayer phone calls, drafting and publishing new forms and publications, revising regulations and issuing other guidance, [and] training employees on the new law and guidance,” Olson said.
Already, she added, implementing the new law has been a mess. “We have already seen confusion about withholding changes, confusion about the deductibility of prepaid property taxes, and confusion about whether states can allow taxpayers to make charitable contributions in lieu of taxes” to circumvent the new $10,000 cap on state and local tax deductions.
“With more funding, strong leadership, and a closer working relationship with Congress,” Olsen said, “I am convinced the IRS can do the job well.”
The proper way to read this statement, of course, is through its converse: The IRS will not get more funding, strong leadership, or a closer working relationship with Congress. Ergo, the agency will not do the job well.
What makes us think that Olson’s wish list will go unfulfilled? We can look at recent history. Republican leadership in Congress has systematically gutted the IRS budget, leading to vastly reduced enforcement — that is, audits.
The agency reported in its 2016 data book that it examined just over 1 million tax returns in fiscal 2016, down sharply from 1.6 million in fiscal 2011. The number of field examinations — these are the detailed face-to-face audits that can resemble your last proctology exam — shrank to 243,722 from 391,621; they also fell as a percentage of the total, to about 23.5% from 25%. That’s unsurprising, since the IRS enforcement staff has been slashed by 23% in that time, to 38,800 people from 50,400.
Lax enforcement disproportionately benefits the rich, naturally, because their returns tend to receive the closest scrutiny. Fewer than 1% of all returns showing income of less than $200,000 were examined in 2016, but more than 10% of those with income of $5 million to $10 million and nearly 20% of those showing income higher than $10 million received audits.
Even Treasury Secretary Steven T. Mnuchin acknowledged that this is a problem. “I am concerned about the staffing of the IRS,” he told senators during his confirmation hearing a year ago. “It is an important part of fixing the tax gap and I am very concerned about the lack of first-rate technology at the IRS.” The “tax gap” is the difference between what people should pay and what the government collects.
The IRS hasn’t issued statistics covering any years since 2010, but for tax years 2008-2010 the agency reported a gap of $458 billion, or 18% of what was owed. The IRS managed to recover only about $52 billion of that through voluntary repayments and enforcement actions.
Nina Olson, the taxpayer advocate, quailed at quantifying the challenge facing the agency in implementing the new law — $495 million was a preliminary estimate only by the IRS, she said.
But one example was telling. It was the reduction in mortgage interest deductibility to mortgages of $750,000, down from $1 million last year. Mortgages closed before mid-December are eligible for the higher deduction. At the moment, “the IRS generally does not know the date of a mortgage closing, the terms of a refinancing, or the date or terms of a purchase contract,” Olson observed. “It will have to develop clear guidance for taxpayers and develop forms and systems capacity to distinguish between loans subject to the $1-million cap and loans subject to the $750,000 cap.” And to do so, probably, without any funding help from Congress.
Most such loopholes are there to be enjoyed by the richest taxpayers and corporations, and those with the best-paid tax advisors, not the little people. But the latter almost certainly will be paying the price.