The IRS is underfunded, but it needs more than cash to stop tax cheats

It's been said that the most feared three letters in the United States are "IRS." Even my own heart has skipped a few beats on the occasions I have received routine correspondence from the agency, and I spent almost three decades working at the highest levels of its Criminal Investigation Division. Over the past decade, however, the agency lacked the resources it needed to strike fear into the hearts of those seeking to evade tax laws. And as funding waned, so did enforcement.

Encouragingly, the Biden administration plans to increase the IRS budget by $80 billion over the next 10 years. But it will take far more than a dramatic one-time infusion of money to cure what ails the nation's revenue arm. Between 2010 and 2019, according to the IRS Data Book, the agency's budget dropped from $14.6 billion to $11.5 billion, and its workforce dropped from approximately 94,000 employees to 73,000 — all while the economy roared on and generated enormous wealth. Starving the IRS of funding was shortsighted, hurting the entire country.

The U.S. tax gap — the difference between what people owe under the law and what they actually pay — could be as large as $1 trillion dollars, according to recent testimony by IRS Commissioner Charles Rettig. While the IRS has not issued a tax gap analysis in about 10 years, it's not a far reach to get there from the most recent gap of $441 billion: As Rettig pointed out, the last analysis didn't include virtual currencies, and their market value is now more than $2 trillion dollars — just one area of potential noncompliance that the IRS says contributes to a growing problem.

Funding cuts prevented the IRS from replacing its aging technology, crippling its ability to pursue its mission. The IRS has some of the oldest computer systems in the federal government, dating back over 60 years — and as more and more returns are filed electronically, and data analytics platforms continue to mature, the agency finds it difficult to keep up with would-be tax cheats. Funding cuts also left the agency short-staffed: With personnel costs accounting for 70% of its budget, the IRS could not counter the attrition when employees retired or resigned.

The number of IRS employees who work on the most complex examinations and collection matters declined the most, according to a July 2020 report from the Congressional Budget Office. From 2010 to 2019, the number of IRS revenue agents declined by 35%, and IRS collection officers dropped by a staggering 48%. But the story goes well beyond civil enforcement: In 1995, the IRS criminal division reported employing 3,797 investigators. At the end of 2020, that number had plummeted by 47%. Put another way, a mere 2,005 criminal investigators are now responsible for investigating tax crimes buried in the over 100 million individual returns filed each year. Alarmingly, over the past five years, the number of reported convictions fell by 66%.

The Criminal Investigation Division, as the only agency with the authority to investigate and recommend prosecution for violations of the tax code, forms the backbone of the voluntary compliance regime that our tax system depends on. The fact that you can go to prison for committing felony tax crimes in the United States provides a strong deterrent to those looking to take an unfair advantage over their neighbors and business competitors. But without sustained funding for rigorous enforcement, the system of voluntary compliance will continue to erode.

The voluntary compliance rate is estimated to be roughly 84%, and every 1 percentage point in this level of compliance costs the U.S. approximately $40 billion dollars. When individuals or corporations skirt their tax obligations, they do so on the backs of their fellow Americans: They pay less, while the rest of us pay more.

Audits have dropped over the past decade, as have investigations of tax evasion and other tax crimes. The examination rate for individuals fell, and it fell more steeply for high-income earners: For returns with over $1 million in total income, the rate dropped from 8% in 2010 to 3 in 2018. Audits for corporations have also fallen dramatically: ProPublica reports that the largest corporations used to be audited annually, but in 2019, only half were audited. Without enough personnel to pursue collections, the revenue from audits has also dropped. Biden administration officials estimate that cracking down on tax avoidance by corporations and the rich could raise at least $700 billion over the next decade, according to the New York Times.

Despite the cutbacks, the IRS has outperformed expectations on some fronts: As the pandemic raged, not only did the agency carry out two filing seasons, but as of mid-April, it had distributed three rounds of economic impact payments to U.S. citizens in need. Is the picture all rosy? Of course not. I, too, am frustrated with the backlog of paper tax returns that have yet to be processed and the calls to the IRS that go unanswered every day.

Unfortunately, simply restoring funding levels is by no means the easy fix. A federal agency deprived of funding for a year or two can tighten its belt and sustain operational efficiency. But a decade of funding cuts meant that the IRS, unable to hire new talent, missed out on almost an entire generation of skilled employees. As tens of thousands of employees resigned or retired, the agency lost a vast amount of institutional knowledge — a resource that will take time and training to restore. (Most technical IRS positions require two or more years of on-the-job instruction before an employee becomes self-sufficient.) A dedicated and consistent funding stream would enable officials to steadily ramp up their enforcement practices. This investment would also signal to potential tax evaders that they can no longer count on short staffing to keep eyes off their fraudulent returns.

The additional funding for the IRS would be a long-overdue game-changer for the agency, but if it is just a temporary infusion of cash, it is likely to fail in its goals. As the adage goes, "You get what you pay for." For too long, the American public has picked up the tab for underfunding IRS enforcement.

Don Fort is the immediate former Chief of the IRS Criminal Investigation unit and the current Director of Investigations at Kostelanetz & Fink LLP. This piece was written for The Washington Post.