On January 17, 2014, President Barack Obama signed into law the omnibus appropriations bill to fund the government through fiscal year 2014, bringing Internal Revenue Service funding below its 2009 level! The Consolidated Appropriations Act (H.R. 3547) allocates $11.3 billion to the Internal Revenue Service, which is a $526 million decrease, or 4.4% decrease from the previous year.

This makes the Internal Revenue Service one of the biggest losers in the 2014 budget deal, since the service would get just $11.3 billion, which is $526 million below its 2013 budget and $1.7 billion less than President Obama requested and is lower than its 2009 budget.

The IRS will receive $2.1 billion in funding for taxpayer services, $5 billion for enforcement, $3.7 billion for operating expenses and $312 million for business system modernization.

The agreement would also require the IRS to spend more time and energy reporting to Congress on a range of activities.

For a nice summary of the consequences of IRS budget cuts, check out the latest report of the Taxpayer Advocate.

Politics aside, it’s time to re-examine the underlying business sense of making large cuts to the IRS budget as if it were any other spending program; especially in light of the agency’s essential functions to enforce tax laws and serve taxpayers and tax professionals. Here are five facts that Congress should consider when debating the IRS budget:

Fact 1: The IRS cannot collect all of what the government is already owed.

The Treasury loses $450 billion each year to taxpayer noncompliance, such as underreporting of income and failing to file or pay taxes. This amount is called the tax gap. To put that number in perspective, the tax gap is about two-thirds of the FY 2013 federal deficit.

Fact 2: The IRS cannot help all of the taxpayers who try to contact the agency.

IRS customer service has suffered greatly due to budget cuts. In 2012, the agency answered only 68% of phone calls and 52% of mail correspondence in a timely manner. In his book, Many Unhappy Returns, former IRS Commissioner Charles Rossotti said it best: “I have never understood why anyone would think it is good business to fail to answer a phone call from somebody who owed you money.” Budget cuts directly impact taxpayers and tax professionals who contact the IRS in an effort to be compliant.

Fact 3: Fewer IRS resources discourage voluntary compliance.

Former IRS Acting Commissioner Steven Miller discussed this problem while speaking to the House Appropriations Subcommittee on Financial Services and General Government on April 9. He stated that because of budget cuts, the IRS’s diminished ability to conduct enforcement activity will cause taxpayers to worry less, “as they realize that they have a better chance of winning the lottery than getting audited.”

Fact 4: The IRS and taxpayers are overwhelmed with tax code changes.

Since 2001, the Internal Revenue Code has undergone more than 5,000 changes—the equivalent of more than one per day—and has become increasingly complex. From 1990 to 2010, filings of the easiest individual tax return, the Form 1040EZ, decreased by 3%, as filings of the most complex individual return, Form 1040, increased by 21%. The National Taxpayer Advocate estimated in 2008 that it takes the average individual taxpayer 26.4 hours to complete and file his or her taxes.

Fact 5: Budget cuts create a barrier to IRS technological innovation that would provide more efficient long-term solutions.

Many IRS computer systems are decades old, and the IRS has been struggling to replace them. When tax laws change or emerging issues arise, the IRS is forced to adapt its antiquated system. For example, in March, the IRS was still altering its computer systems to accommodate the “fiscal cliff” changes to the Code that were enacted on Jan. 2. As a result, the delays prohibited many taxpayers from filing early.

Sources: Forbes, WSJ, Beyond415

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