Report: IRS Budget Cuts Cost Billions in Evasion Per Year

Written by SK Ashby

Congressional Republicans have taken pot shots at the Internal Revenue Service (IRS) budget for years and, according to a new report, the individually-small budget cuts have added up to take a significant toll on the agency's core mission to collect revenue.

More specifically, budget cuts have severely eroded the agency's ability to even conduct audits much less prosecute anyone caught committing fraud.

The IRS' mission to crack down on cheaters is on the brink of "collapse" according to Pro Publica.

Last year, the IRS’s criminal division brought 795 cases in which tax fraud was the primary crime, a decline of almost a quarter since 2010. “That is a startling number,” Don Fort, the chief of criminal investigations for the IRS, acknowledged at an NYU tax conference in June. [...]

The result is huge losses for the government. Business owners don’t pay $125 billion in taxes each year that they owe, according to IRS estimates. That’s enough to finance the departments of State, Energy and Homeland Security, with NASA tossed in for good measure. Unlike wage earners who have their income separately reported to the IRS, business owners are often on the honor system. [...]

The IRS typically catches [evasion] by auditing taxpayers. Theoretically, evidence picked up in audits can be used to start criminal cases.

But the rate at which the agency audits tax returns has plummeted by 42 percent since the budget cuts started. Criminal referrals were always rare and are becoming rarer still, dropping from 589 referrals in 2012 to 328 in 2016. With the government conducting 1.2 million audits in 2016, that’s one criminal referral for roughly every 3,600 audits.

Individuals may see this as a sign that they can get away with committing fraud or fudging their returns, but I think an even larger concern is what the GOP's tax cuts passed in late 2017 could lead to when combined with these budget cuts.

While the Treasury Department has take small steps to close some of the most obvious loopholes opened by the GOP's tax cuts, it's the less obvious and less reported loopholes combined with an absence of audits that could send federal revenue plummeting even more than we expect to see.

Schemes that allow wealthy individuals to reclassify their income to obtain lower tax rates under the GOP's tax cuts may not even be discovered if they're never audited. Furthermore, Pro Publica reports that the quality and detail of audits has also dropped as IRS agents are pressured to move on from them as quickly as possible. There's no guarantee a quick audit would turn up any wrongdoing.

It's not as if the IRS' mission has changed. Lawmakers have not told the agency that collecting revenue and enforcing the law is no longer important. What they've done is force the agency into a position of doing as much as it can with fewer resources. Audits haven't decreased by 42 percent since 2010 because fewer Americans are committed fraud; they've decreased because the agency is physically incapable of doing more.

No one wants to be audited or even pay taxes for that matter, but the biggest beneficiaries of these budget cuts are not average Americans. When the IRS is crippled, it's the wealthy who get away with committing white collar crime. They're the ones with all the money, after all, and they're already far less likely to see any consequences from pushing the system to the limit. They can afford expensive lawyers and accountants to ensure that they never do.