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Policy Toward Internal Revenue Service Takes the Cake

What is the dumbest policy pursued by Congress and the White House? The competition is stiff. One hot contender might emerge on Thursday, if the House votes for H.R. 2844, the Sensenbrenner/Dreier bill for expedited special elections in the face of catastrophe; in one fell swoop, it would eliminate primaries, block nearly all independent and third-party candidacies to Congress, disenfranchise overseas military voters in Iraq and elsewhere, do violence to civil rights voting protections, and impose a huge unfounded mandate on the states. It takes real talent to put that much damage into one small bill.

[IMGCAP(1)]Another top-tier candidate is spectrum policy, typified by a 1996 telecommunications act that allowed broadcasters to occupy two huge slices of prime airwaves indefinitely — spectrum worth many tens of billions of dollars to the public — to satisfy the less than 15 percent of Americans who rely on over-the-air broadcast television.

But that’s not the winner either. The winner is policy toward the Internal Revenue Service. Keep in mind we have $500 billion-plus deficits as far as the eye can see and huge unmet needs. Forget the debate about taxes or tax cuts; just consider the current tax code and what people and companies legitimately owe under the system. Each year, we fail to collect about $300 billion because people and companies fail to pay what they owe. Without raising taxes or cutting other programs, we could cut our budget deficits to manageable, even negligible, levels, if we simply collected what is owed under the system.

Why don’t we? Because Congress and presidents have consistently underfunded the agency and its programs, including adequate personnel to conduct audits and to collect from tax cheats, and failed to modernize the system to match numbers and weed out problems and inconsistencies with returns. In this year’s budget submitted by the White House, the modernization budget was slashed from $388 million to $285 million.

Increases in other parts of the IRS budget have not kept pace with inflation or mandatory staff salary increases, meaning fewer personnel to screen returns, identify cheating schemes or conduct audits. The problem has accelerated since 1996. Even where enforcement money has come in to the agency in larger amounts, part has regularly been diverted to cover other spending areas, making the problem that much worse. Here are the grim numbers according to the Transactional Records Access Clearinghouse, an organization based at Syracuse University that tracks IRS performance: Since 1988, IRS’ permanent staff is down 31 percent while the number of returns filed by individual taxpayers is up 26 percent. In fiscal 1999, there were 6,399 revenue officers; in 2003, there were 5,004. In the same period, revenue agents went from 13,022 to 11,513. In the mid-1990s, the IRS employed more than 3,300 criminal investigators; in fiscal 2003, the number was 2,805.

Here are the results: Personal audits are half the rate of 1996, even though they have been going up slightly in recent years. Is it a coincidence that surveys conducted for the IRS oversight board show that the number of Americans who think it is not wrong to cheat on their taxes is up 6 percent in the past four years, to nearly 20 percent.?

The problem is much worse with audits of companies. Audits for all businesses were down from three per 1,000 tax returns in 1999 to two per 1,000 in 2003. But the problem is more severe than those numbers suggest. More and more of the audits are done by mail, far less effective than face-to-face audits. Those thorough audits for corporations were down from 15 per 1,000 to seven per 1,000. The real money comes from the largest corporations — those with assets of $250 million or more. Face-to-face audits of these companies dropped from 347 per 1,000 to 290 per 1,000. When the audits uncover problems, the penalties for civil negligence have declined, in number and dollars collected. Criminal cases and criminal penalties are also down. The IRS oversight board says when the agency identifies tax cheaters, it doesn’t have the resources to track down and claim the money — only 18 percent of known cases in 2003 of tax schemes intended to hide income were pursued, leaving $447 million uncollected.

How can Congress be so stupid? For one thing, IRS bashing is very popular in the country, and lots of politicians can’t avoid the temptation. That includes presidents and OMB directors. Audits are essential ways of raising money that legitimately belongs to the public treasury, but they are widely unpopular. And there have been abuses of IRS authority in the past, as with all agencies that have vast power over people. At the same time, the drive to cut budget numbers where one can to show immediate budget discipline — even when it is clearly a penny-wise, pound-foolish approach — is a powerful one in Congress.

Nonetheless, here is a bottom line. The IRS oversight board, reflecting what reams of research show, says that a $500 million increase in the enforcement budget would mean $5 billion in added revenue. Not to do this is ridiculous. The $5 billion uncollected will show up elsewhere, with the non-cheating taxpayers making it up or, by adding it to the deficit, putting the burden on future generations. It is a measure of the stupidity of the policy that the odds of adding $500 million to the enforcement budget are slim to none — and slim just left the building.

Norman Ornstein is a resident scholar at the American Enterprise Institute.

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