United We Stand, Divided We Fall

Jim Buttonow, CPA/CITP wrote an article entitled The Impact of Underfunding the IRS which appeared in the CPA2Biz on January 27, 2014. It was a great article and reinforces what we have been discussing for months. There are consequences when you cut the resources the IRS has to administer and collect taxes. He notes 5 consequences. The first is that ‘the IRS cannot collect all of what the government is already owed’. The cost of cutting the IRS by $1 is between $7 and $17 in reduced taxes collected, a steep price to pay for either across the board cuts or a political witch hunt however justified. The second consequence noted by Buttonow is ‘the IRS cannot help all of the taxpayers who try to contact the agency’. He states that the ‘agency answered only 68% of phone calls and 52% of mail correspondence in a timely manner’ in 2012. That is terrible customer service especially given the customer potentially owes you money. The third consequence is that ‘fewer IRS resources discourage voluntary compliance’. We already have a problem with the tax gap of $450 billion per year and fewer audits and other collection efforts will make that problem or tax gap worse. As we have seen from the results of the current IRS audits, these audits generate boatloads of uncollected taxes especially for those making over $200,000. We should be funding audits of 100% of the taxpayers over $200,000 and substantially increasing the audits of those under that amount. To do otherwise and especially decreasing audits and collection efforts is not sensible. The fourth consequence he noted was that ‘the IRS and taxpayers are overwhelmed with tax code changes’. He indicated that there have been more than 5,000 changes to the tax law since 2001. This is now compounded by the burden the IRS has for administering part of the new Obamacare law. From a taxpayers and a tax preparers perspective, it has meant the use of more complex primary tax documents (going from the 1040 EZ to the 1040) as well as the required utilization of many more supporting documents. The fifth consequence he notes is ‘that the budget cuts create a barrier to IRS technological innovation that would provide more efficient long-term solutions’. The IRS computer systems are old and need to be upgraded. They also need to get ahead of the curve on technology to prevent the huge tax refund fraud that we have recently discussed. In essence, cutting the IRS is much more than counterproductive.

We recommend adding $5 billion to the IRS budget for FY 2014. $1 billion will be used to restore the cuts to the IRS budget since FY 2011. The other $4 billion will be used, as we have discussed before, for additional audits and other collection activities designed to shrink our $450 billion tax gap to a more reasonable level as well as to counter the exploding tax refund fraud from gangsters and other thieves. These added funds will cut the current federal deficit by 33% to 67% depending on the results. The President and the Congress should act immediately. Time is money and time is running out.
Harry Pukay-Martin