IRS Funding Is a Missed Chance for Bipartisanship

Last month, Democratic and Republican senators struck a $1 trillion compromise on a wide-ranging bill to fix critical national infrastructure. It included a $40 billion increase in funding for the Internal Revenue Service over 10 years to provide stronger tax enforcement, which, in turn, was expected to generate significant new federal revenue. The White House had wanted $80 billion.

Unfortunately, the IRS provisions were removed from the bipartisan legislation this past week after GOP senators learned the Democrats were including an additional $40 billion in IRS funding, plus additional new IRS powers, in their $3.5 trillion social program “wish list” legislation.  For Democrats to "back door" these changes through reconciliation was disingenuous and went against the spirit of the compromise in the bipartisan bill.

On the other side, moderate Republicans had already come under heavy pressure from GOP activists who viewed even a potential $40 billion in IRS funding to be excessive. So they took the funding provision out of the compromise entirely.

It's a shame because, for the past decade, the IRS has been seriously and increasingly underfunded. And, using the tax agency as a partisan football undercuts its legitimacy and is harmful to the national interest.

Conservative concerns about over-funding the IRS are not baseless. In the past, some within the agency have acted dangerously and incompetently — including the recent leak of years of personal data for thousands of taxpayers. In addition, there's reason to be skeptical about the IRS’s ability to spend even $40 billion effectively, or to deliver the magnitude of additional revenue envisioned.

But the agency has also had some remarkable successes during the past few years that demonstrate its competence and integrity, such as transitioning more than 90% of taxpayers to electronic filing, and, most recently, distributing hundreds of millions of stimulus payments in record time.

The IRS collects more than 95% of all annual federal revenue — $3.6 trillion a year. To the extent the government doesn't collect what it's owed, the tax gap, and our federal debt, go up. Despite ever-increasing demands on the agency, Congressional opposition to IRS funding has resulted in a 20% decline in the agency's budget from a decade ago (adjusted for inflation), and a nearly 30% decline in spending on enforcement.  At recent funding levels, the IRS is unable to answer the phone half the time; audits about half the percentage of taxpayers it audited a decade ago; and processes tax returns on antiquated software.

No business would regularly under-invest in the revenue engine that generates 95% of its revenue.

The Trump administration, and particularly its Treasury Department (of which we were a part), understood this. We advocated for multi-year increases in the IRS budget and significant investments in technology, taxpayer service and enforcement.  We understood that investments in all these areas would increase revenue, tax compliance, fairness and confidence in our voluntary tax system. 

As part of the previous administration, we worked with the IRS to develop a six-year $2.3 – $2.7 billion technology modernization plan, and to provide Congress with a $4 billion five-year plan to improve the IRS's interaction with taxpayers. We proposed hundreds of millions annually to upgrade compliance and enforcement.

President Joe Biden’s 2022 budget proposes $13.6 billion for the IRS; an increase of well over $1 billion that will allow the IRS to answer more calls, better train its staff to answer taxpayers’ questions and audit more taxpayers in a focused manner. But it's not enough to transform the IRS into the world-class financial institution the American people deserve.

Will it take $40 billion over 10 years — or $4 billion a year — on top of that basic funding increase proposed in the president’s budget? Perhaps. Until we see the details, we can't say for sure. But now Congress appears to have abandoned the chance for such a solid, bipartisan compromise. Instead we're facing the prospect of the Democrats, to give Biden what he wants, simply putting all $80 billion in their reconciliation bill — along with a dangerous expansion of IRS powers.  Having one party jam through such a dramatic escalation in the agency's reach is something that should concern every American.

The more modest modernization plan we proposed was aligned with the IRS’s capacity to upgrade technology in a timely and responsible manner, as affirmed by independent consulting firm, McKinsey & Co. The IRS's ability to recruit and deploy the number of skilled professionals that would be justified by an additional $40 billion — much less $80 billion — will be handicapped by the fact that as many as 50,000 of the IRS’s 80,000-person workforce are eligible to retire during the next five years.

Meanwhile, setting aggressive revenue goals for enforcement could pressure the IRS to amplify collection efforts in a way law-abiding taxpayers won't appreciate. Statements by Biden administration officials that the funding would go toward auditing only certain taxpayers represent a significant break from tradition in which the IRS, not politicians, decided who should be audited. Finally, forcing banks to report all taxpayer transactions represents an unprecedented expansion of IRS authority. What next? Reporting of phone records and email accounts?

The size and power of the IRS is a matter that affects not only our national treasury, but also our national character. It should not be left to one party to impose. We call on Biden to show leadership, and for Democrats and Republicans to return to the bargaining table to reach a compromise that neither might view as perfect, but that both parties can support.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David F. Eisner was assistant secretary for management at the Treasury Department from 2018 to 2021.

David J. Kautter was assistant secretary for tax policy at the Treasury Department from 2017 to 2021. He previously served as acting commissioner of the IRS.

©2021 Bloomberg L.P.

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