Memo to Congress: The IRS Is Where the Money Comes From

The "tax gap" — the amount of taxes Americans owed but failed to pay — reached almost half a trillion dollars a year for the years 2008 through 2010 — an average annual loss of $458 billion, according to an analysis by the Internal Revenue Service.

That led Republicans in Congress to go on the warpath, naming the closing week of April "IRS Week" and summoning the IRS chief, John Koskinen, to answer for the agency's appalling inefficiencies in four hearings over eight days conducted by efficiently overlapping congressional committees.

To vent its wrath, the Republican-controlled House passed half a dozen measures to penalize the tax agency. "House Republicans are finding new ways to rein in the IRS", said the conservative Weekly Standard. No bonuses until service improves, is one of them. Senator Orrin Hatch, Republican of Utah and chairman of the Finance Committee, said the IRS should to do a better job. “This recent data further underscores the need for the IRS to get smarter about guaranteeing tax compliance and restore trust and faith in the agency”. House Speaker Paul Ryan, Republican of Wisconsin, said much the same: “Right now, we have a tax code that no one can understand being enforced by an agency that no one trusts". House majority leader Kevin McCarthy, Republican of California, called the agency "a picture of government corruption and incompetence."

Some Democrats joined in. Senator Ron Wyden of Oregon is angered by corporations dodging some $400 billion in taxes over the past 10 years. "It’s time the IRS put an effective tracking and auditing system in place to locate this lost money”.

So how is the IRS to "get smarter" and pay for tracking and auditing systems? These same legislators in the House and Senate have seen fit to cut the IRS budget every year from 2010 through 2015 for a total of $1.2 billion, causing the agency to shrink by 17,000 employees. At the same time the number of taxpayers in the U.S. has risen by 10 million. And, of course, it is also these legislators who have, over the years, concocted a tax code of grotesque complexity, without consultation with the IRS, only to leave it to the agency to administer their absurd minutiae of rules in unavoidably tangled worksheets on the tax forms. "Life would be simpler for taxpayers and simpler for us if the tax code were simpler", IRS chief John Koskinen says. But Congress talks endlessly about tax reform while doing nothing.

The pattern is for Congress to choke off funding to produce results to complain about, hopefully as cameras whir in committee hearings for their voters to see on local nightly news. This sham continues at precisely a time when the IRS needs to be strengthened. The service has been beset with a host of new problems, most notably a security breach in 2015 that netted hackers data on some 700,000 tax filers. Along with the revelations exposed by people using social media, such data equips cyber-thieves with the personal identity-verification answers needed to impersonate actual taxpayers and divert refunds to themselves. The number of attempts quadrupled to 730,000 between 2010 and 2014. The agency estimates that there are about a million attempts each day to illegitimately access taxpayer accounts. Koskinen reports that these attempts have shifted beyond individuals looking for a payday to organized crime syndicates that require more rigorous defenses against break in.

But Congress expects the IRS to combat these new assaults with 5,000 fewer revenue agents, officers and criminal investigators than five years ago. That didn't stop Representative George Holding (R-NC) from complaining to Koskinen that the IRS is not trying hard enough to catch criminals, saying, “You can’t deter crime unless you prosecute crime”.

And of course there is the worldwide problem of the wealthy hiding money offshore, most recently evidenced by the leak of names from a Panama law firm.

Republicans are irate at the IRS for selectively sidelining conservative groups applying for tax-exempt status during the 2012 presidential campaign. They had applied as the 501(c) "social welfare" form of organization that avoids the disclosure of donor names that other classifications require. A Cincinnati unit charged with vetting these groups had filtered out those with words like "tea party" or "patriot" in their titles for special scrutiny. (It was later shown that the group had filtered for Democratic political groups as well, but that didn't make much headway in the media). That these groups claim they exist for "promoting the common good and general welfare of the community as a whole" is, of course, risible. Stung by the 2012 episode, the IRS this year even granted that status to Karl Rove's Crossroad GPS PAC, a testament to how compromised the system is. Such groups are entirely political, but the IRS has to go along else risk still further defunding.

Republicans have ever since used the indiscretion of that Cincinnati office to characterize the entirety of the IRS as corrupt. It happened before Koskinen came on board, but now,
IRS Commissioner John Koskinen
having "agitated" for months, House Republicans have apparently persuaded the leadership to pursue the impeachment of Koskinen for "misconduct" having to do with lost e-mail transmissions during the scandal.

The misdeeds of that one unit, which stands well apart from the main business of the IRS, is used by demagogues such as Ted Cruz as grounds for abolishing the IRS altogether and to claims of Majority Leader McCarthy that "thousands of IRS employees are delinquent on their own taxes". That willful distortion proved instead to be an average of 160 employees a year over 10 years out of a work force of 85,000. In its Caesar's wife position, the IRS stands watch; employees who are delinquent in filing are subject to disciplinary action. Koskinen says "the IRS has the highest compliance rate by far of any federal agency or any congressional operation". Was Koskinen perhaps thinking of Sen. Bob Corker (R-TN), who was discovered by the Wall Street Journal to have failed to disclose $3.8 million of income from hedge funds and real estate? Corker apologized for the "oversight". No problem, Bob. All was forgiven. Such are Senate ethics.

The budget cuts voted by Congress have led to huge declines in IRS service to taxpayers and howls of complaint from Congress members who cut the budget. Lack of funds has led to a backlog of almost a million pieces of unanswered correspondence from taxpayers. Wait time for callers with questions went from 10 to 24 minutes in 2015, fanning the incompetency pronouncements by Congressional members who seem to have difficulty correlating those funding cuts with the inability of the IRS to hire people to answer phones. Feeling the heat of constituent complaints, they did make that connection this year — it's an election year — and for the first time in five years voted an increase in the IRS budget of $290 million. But the new money was earmarked to be used only for voter concerns: taxpayer service, cyber-security and identity theft. As for service, a low of 37% of callers getting through shot up to 70%. Not enough but, as Koskinen says, "It’s a direct line of, if you give us the money, and we can hire people, they will be able to answer the phone".

Of the 17,000 employees lost to budget cuts since 2010 when Republicans gained control of the House (it originates funding bills), 5,000 were engaged in enforcement. Yet they are the moneymakers. Koskinen says that "every dollar invested in us returns at least $4 to the Treasury" but the ratio for enforcement personnel is much higher — more like $10 for every $1 spent, he says.

So by what illogic does Congress cut IRS funding? The answer is that it is deliberate, deeply cynical and corrupt. The biggest targets for enforcement audits are the deep pockets that pay for Congress members' election campaigns. So Congress makes certain the agency doesn't have the money for enforcement personnel and it restricts use of money to other purposes. Taxpayer service, as we just saw.

The result? Audits are at an 11-year low with the number of tax enforcement employees down 24% from 2010. Last year the IRS audited 1.2 million individual tax returns out of 147 million, the fewest in a decade. That's less than 1%, sacrificing revenue that runs to many billions of dollars. Doesn't that add to the government deficit that so upsets conservatives in Congress? It is difficult not to conclude that lurking behind this charade is the "starve the beast" agenda of the ultra-right that hopes to deprive the government of funds so as to reduce it, in Grover Norquist's memorable image — he runs an organization that fights all forms of taxation — "to the size where I can drag it into the bathroom and drown it in the bathtub".

That leaves Koskinen to find other means to go against those who work to hobble or abolish the essential agency that funds the government. To beef up enforcement he has found a way — mostly by attrition of other categories of personnel — to hire and train 700 new enforcement agents, "the first significant enforcement hiring in more than five years", he says. Serving up more proof that Republicans do not welcome efforts to increase revenue for the government, chairman of the House Oversight and Government Reform Committee, Jason Chaffetz (R-UT) is demanding to know how Koskinen has found the money to hire the 700 staffers. Chaffetz, whose only job before politics was in public relations for "multi-level marketing" firm Nu_Skin International (which had been the target of an Federal Trade Commission investigation), apparently doesn't grasp that simple attrition could provide openings for all 700 in an IRS of 85,000. Instead, in a letter reminding Koskinen that he had just asked in February for a $1 billion funding increase, Chaffetz wrote, “The inescapable conclusion is that your testimony to Congress was inaccurate, reflecting either an attempt to exaggerate IRS’s budget needs or a management failure in understanding the needs of your organization”. In Chaffetz's math, having found a way to hire 700 enforcement agents has extinguished the need for the billion dollars at an agency that is short 17,000 employees. Moreover, though, despite the new hires, the IRS will still end fiscal 2016 with 2,000 fewer workers than it started. So goes Congress' war to hobble the IRS.

Koskinen knows better than to assign the new hires to forensic work examining high income earners and risk budget retaliation from lawmakers concerned for their campaign donors. So he has carefully made the point that the new agents will be deployed to go after low-yield taxpayers — small businesses and the self-employed. Apparently, the 1% at the top won't be inconvenienced.