Making Certain Government Can’t Do Its Job

The Internal Revenue Service has let it be known that it won't be able to answer half your phone calls, and can only field easy questions. Anything more complicated, see your tax advisor.

For the reason, look no further than Congress. Demonstrating its wisdom, it has cut the budget of the one agency that brings in the money. It is also Congress, of course, that keeps piling on the complexities that have given the IRS a tax code approaching 75,000 pages to deal with, at the same time talking on and on about how we must reform the tax code, all the while doing nothing except to make it worse.

Budget cuts at the IRS led to 12% in staff reductions between 2010 and 2013. Reduction in enforcement — the auditors, collections officers and criminal investigators who pursue tax cheats — resulted in $7 billion less collections across those years.

The IRS is not the only case where cuts were made in the government units that bring in money. The Republican fervor to reduce government spending seems to pay no attention to money lost by indiscriminate cutting at agencies that far more than pay for themselves with the bounty their efforts bring in.

Medicare and Medicaid fraud are rampant. It is far more difficult to rob a bank. Medicaid doles out $415 billion a year, Medicare nearly $600 billion. Total health spending in America is a massive $2.7 trillion, or 17% of GDP. The Rand Corporation estimates that fraud and the costs of combating it add nearly 10% to Medicare and Medicaid costs — as much as $98 billion a year.

One would think that Congress would gladly spend the money to develop a special unit to go after the crooks. Instead, Medicare has to track down cheats using its own operational funds. Staffing is sparse. New York Medicaid pays out $55 billion in a year and investigators need to look for abuse among 137,000 providers, but the job is left to only 110 investigators and support staff. Yet with all that money going to scammers, an auditor with Health and Human Services (HHS, of which Medicare and Medicaid are a part) said last year that budget cuts would force the agency to cut 20% of its oversight staff.

Medicare/Medicaid can revoke billing privileges of medical professionals (only to see them petition the courts to have themselves reinstated) but it is the Justice Department — the FBI — that has the legal power to arrest and prosecute. Deep cuts have been made to the FBI budget as well. As it is, the FBI is directed to turn its attention to terrorism and cybercrime, which leaves still less resources to chase after what seem to be legions of crooked doctors and hospitals across the United States.

The brainless sequester — a blunt weapon of cost-cutting agreed to by Republicans and the President as the default should they not come to a sensible deal (which they did not) — does particular damage by cutting uniformly across the government without regard to what has value and what is marginal or wasteful. No matter if it crimps an agency that fills the coffers with the money the government needs. For every dollar the sequester or other budget slashing takes from investigative units that feret out Medicare or Medicaid fraud, eight dollars are lost. That's the acknowledged money recovery ratio forsaken by the zeal of budget cutters who don't consider consequences. “Everyone [in Congress] is excited that we bring in eight times more than we cost, but that hasn’t translated into more funding”, was the comment in a hearing of one of the HHS investigators.

As for the IRS, it is not outlandish to ask whether members of Congress deliberately underfund the agency to protect their wealthy donors from scrutiny. That is exactly what is going on, said Jared Bernstein, a former economic advisor at the White House, in The Washington Post. He cites an estimated annual difference of $385 billion between what people pay in taxes and what they actually owe, a gap that goes unattended for lack of auditors the department needs to pursue it. Last year it was reported that most members of Congress are millionaires. Voting to cut IRS funds would seem to be for them a matter of personal self-interest.

In 2013 the IRS had only enough resources to audit 24% of tax returns reporting income over $10 million, and 16% of returns reporting between $1 million and $5 million — both of which percentages have been declining from previous years. A The New York Times article from last summer says many employees are left to use computers that still run the XP operating system, which is renowned as highly susceptible to invasion by hackers rerouting refunds and so old that Microsoft has discontinued supporting it.

The IRS is being punished for selectively blocking right-leaning organizations from obtaining tax exempt status in the run-up to the 2012 elections, is the claim put forth by the conservative camp, although underfunding has been driving down the IRS budget since before then. Fact is, not answering our phone calls is not a budget matter; it is the IRS deciding to punish us "for its own stonewalling" of those tax avoiding organizations. So says a Wall Street Journal editorial. Bloomberg/ BusinessWeek agrees with the punishment thesis saying, "Republicans in Congress have celebrated these cuts, arguing that, [the IRS] unfairly scrutinized Tea Party groups seeking tax-exempt status". These celebrants gleeful about cutting the IRS's ability to go after that missing $385 billion are the same Republicans who regularly rend their garments about the deficit and the $18 trillion national debt.

A word about the "scandal": The Cincinnati unit's job was to determine the extent to which organizations applying for tax exempt status were engaged in political activities. The statute says that a group is eligible for tax free status if it is "operated exclusively for the promotion of social welfare" and "for purposes beneficial to the community as a whole". But that strict criterion was relaxed in recent years. Groups are bow granted 501(c)(4) status as long as they don't promote particular candidates and are not "primarily engaged" in electioneering. The argument for allowing political activity as a tax-free haven is that it is often unavoidable to advance social policies while holding back from influencing elections of persons who will decide on such policies.

That rings true on the local level, but the Supreme Court's Citizen United decision unleashed torrents of money into politics and gave rise to the likes of Crossroads GPS, the megalith begun by political operatives Karl Rove and Ed Gillespie that raised $180 million for promoting the conservative cause in the 2012 campaign. Exemption from taxes has such groups contortioning themselves into paragons of civic virtue to qualify for 501(c)(4) status. The other attraction is, of course, that donor names may be kept secret. That such a political front as Crossroads GPS masquerades as a "social welfare" group that should be exempt from taxes is of course absurd. We might note that the rest of us cannot deduct political contributions from our taxable income.

Righteously indignant, evidently, the Cincinnati office went out of bounds by searching for groups with names or texts containing words such as “tea party”, “9/12” and “patriot” and deliberately delaying their approvals with audits and time-consuming back and forth questioning.

The targeting of right-wing groups handed IRS-haters an opening to trump up demonization of the IRS as a whole. The single rogue field office became the "out-of-control tax agency", as The Wall Street Journal put it. "Watergate 2.0 -- why the IRS scandal is far worse“, headlined Fox News. "The IRS tea-party audit story isn't Watergate; it's worse than Watergate,” said deputy Wall Street Journal editorial page editor Daniel Henninger. ”The single most important tax reform, we should abolish the IRS”, says Texas Republican Senator Ted Cruz. "The Time Has Come: Defund the IRS", wrote flat-tax fetishist Steve Forbes at his magazine.

One motive for writing about this stuff hereabouts is to call out the lies of government, politicians and the media. As good as a lie is to hide facts that weaken a position or to manipulate facts so as to mislead — as when a Journal editorial tells us that the deteriorating service from the IRS is not because of budget cuts; rather, that the IRS is "pleading poverty" despite "from 1997 to 2012 the IRS budget increased 64% to $11.8 billion in nominal dollars". Since then, they acknowledge, it has been cut to $10.9 billion for 2015 because of "agency stonewalling — plus a less friendly environment for discretionary spending".

Sounds like they have a point, until one looks past the deliberate attempt to mislead. First, the increase from 1997 to the reduced $10.9 billion becomes 50%, not the now irrelevant 64% that the editorialists preferred not to adjust.

Either number means the IRS budget in 1997 was $7.2 billion. Now note the word "nominal" above. That means not adjusted for inflation. What would the buying power of that $7.2 billion of 1997 be worth in today's dollars? The answer is $10.6 billion according to the inflation calculator at the Bureau of Labor Statistics. In other words, the IRS's budget has hardly budged: $10.6 billion in 1997 inflation adjusted versus $10.9 billion now.

With its reduced staff and the budgetary need to cut training costs by 83%, the agency must deal with the Foreign Account Tax Compliance Act enacted in 2010, a surge in identity thefts, and now the significant added load of having to manage the subsidy eligibility and crediting imposed by the Affordable Care Act.

Congress deliberately wants to create a mess at IRS so they can concoct yet another Obamacare failure. And as we see, the editorial writers at the Journal were only too glad to play along by obfuscating the facts.