The Real IRS Scandal That's Costing Uncle Sam Trillions
The Internal Revenue Service (IRS) is facing a crisis, just not the one many pundits and most conservatives think.
To be sure, the Republican excavation project to unearth the smoking gun proving the agency targeted right-wing "social welfare organizations" over their non-profit status will continue. As Republican National Committee Chairman Reince Priebus described his party's lawsuit this week, "We're done playing footsie here with the IRS."
But the real scandal is that Republicans and their conservative amen corner have already done something much worse to the IRS. After their successful 1990's crusade to gut the Internal Revenue Service, the GOP is once again slashing its budget, demonizing its employees and even questioning the legitimacy of its mission. With its funding cut by Congress for four years in a row, the agency now has 10 percent fewer agents and officers than five years ago and fewer agents auditing returns than at any time since at least the 1980s. One result is that the "tax gap"--the difference between what the American people and U.S. businesses owe the federal government and what they actually pay--has mushroomed to an estimated $500 billion from $195 billion in 1998. To put that in context, that's more than the entire projected federal budget deficit for this year.
Before looking at the frightening numbers behind today's sad state of the IRS, it's important to recount the history of how the GOP became, as Jonathan Cohn aptly put it, the "pro-deficits, pro-tax evasion" party.
For starters, the GOP's best and brightest have ridiculed the very notion that the richest Americans can even be asked to pay higher taxes. "It's really American to avoid paying taxes, legally," South Carolina Senator Lindsey Graham declared in defense of Mitt Romney in 2012, adding:
"It's a game we play. Every American tries to find the way to get the most deductions they can. I see nothing wrong with playing the game because we set it up to be a game."
A game, that is, that will be won by the well-to-do, since apparently they are the only ones financially qualified to play it. In rejecting a small increase in gilded class tax rates, President George W. Bush summed up the rules by explaining that "the really rich people figure out how to dodge taxes anyway." Supply-side snake oil salesman Arthur Laffer agreed:
"You really can't collect much money from upper-income people. They know how to get around taxes."
Their task is made even easier if the Republican Party convinces a wide swath of the American public that the Internal Revenue Service is, as Maine Governor Paul LePage claimed, "the new Gestapo" which is "headed in the direction of killing a lot of people." As it turns out, LePage was only regurgitating 20-year-old GOP talking points.
As David Cay Johnston explained in his 2003 classic Perfectly Legal, the GOP during the Clinton administration waged an all-out war on the IRS, turning the priorities for auditing Americans upside-down. Then as now, GOP spinmeister Frank Luntz framed the issue for his Republican allies: "Which would you prefer: having your wallet or purse stolen or being audited by the IRS?" As Senator William Roth's Finance Committee held hearings in 1997 and 1998, Mississippi's Trent Lott decried the IRS' "Gestapo-like tactics" while Alaska's Frank Murkowski protested, "You don't need to send in armed personnel in flak jackets." Former Senator Don Nickles of Oklahoma simply raged, "The IRS is out of control!" Congress went on to pass and Bill Clinton to sign the IRS Reform and Restructuring Act in 1998.
Even as then-IRS Director Charles Rossotti warned Congress about an epidemic of tax cheating, Senator Phil Gramm in May 1998 denounced the agency. Peddling myths of jack-booted IRS agents tormenting American taxpayers, Gramm called on Rossotti to fire his 50 worst employees. Gramm concluded:
I have no confidence in the Internal Revenue Service of this country. You do not have a good system. This agency has too much unchecked power.
As the New York Times recounted that spring, the plan to gut the IRS advocated by Phil Gramm and his allies was a popular political gambit, but almost certain to create incentives for tax evasion:
Mr. Gramm spoke at length of how he had ''no confidence'' in the I.R.S., remarks that were in sharp contrast to those of every other senator, who emphasized that the majority of I.R.S. workers were honest and most taxpayers law-abiding.
A variety of tax experts have said in recent weeks that attacks on the I.R.S., which polls show are a potent device to win votes and contributions for Republicans, give comfort to tax cheats and discourage honest taxpayers.
Which, of course, is exactly what happened. IRS staffing was slashed and audits of the wealthy dropped precipitously. As Johnston explained:
In 1999, for the first time, the poor were more likely than the rich to have their tax returns audited. The overall rate for people making less than $25,000 a year was 1.36%, compared with 1.15% of returns by those making $100,000 or more...Over the previous 11 years audit rates for the poor had increased by a third, while falling 90 percent for the top tier of Americans.
By 2006, as the New York Times reported, "Over the last five years, officials at both the I.R.S. and the Treasury have told Congress that cheating among the highest-income Americans is a major and growing problem." As former Reagan administration official Bruce Bartlett explained in 2012, "As the I.R.S. data show, noncompliance increased between 2001 and 2006, a period in which a substantial number of tax cuts were enacted." All told, according to the IRS estimates, the tax gap for 2006--that is, revenue lost to evasion, fraud and underreporting--reached $385 billion. That's $95 billion more than in 2001 and almost double the $195 billion Rossotti warned Congress about in 1998.
By 2010, other projections put the tax gap as high as $500 billion a year, a sum equal to about 15 percent of the entire federal budget.
Nevertheless, the Republicans' anti-IRS drumbeat continued unabated. Even with 20,000 fewer total employees than in 1992, Bartlett lamented, "Republicans have been treating the IRS like a political punching bag for years, cutting its personnel and restricting its ability to do its job." Like a punching bag, even when IRS workers were killed for just doing their jobs.
Declaring, "Well Mr. Big Brother IRS Man, let's try something different, take my pound of flesh and sleep well," disgruntled taxpayer Joseph Stack in February 2010 flew a small airplane into the IRS office in Austin, Texas. His suicide attack killed IRS employee and Vietnam veteran Vernon Hunter. But instead of producing universal revulsion, some Republicans in Congress essentially blamed the victim. As Rep. Steve King (R-IA) put it:
It's sad the incident in Texas happened, but by the same token, it's an agency that is unnecessary and when the day comes when that is over and we abolish the IRS, it's going to be a happy day for America.
(Three years later, Texas GOP Senator Ted Cruz echoed that line, announcing, ""We ought to abolish the IRS and instead move to a simple flat tax, where the average American can fill out our taxes on a postcard.")
Newly elected Massachusetts Republican Senator Scott Brown similarly seemed to show King's sympathy for the devil:
I don't know if it's related, but I can just sense not only in my election, but since being here in Washington, people are frustrated. They want transparency, they want their elected officials to be accountable and open and talk about the things that are affecting their daily lives. So I'm not sure that there's a connection, I certainly hope not. But we need to do things better.
One person who had been doing things better was President Barack Obama. In his first two years in office, Obama's administration began to level the playing field for the IRS versus the tax cheats. The agency finally reversed its decade-long bias for the wealthy. The agency offered the carrot and stick of an amnesty program and prosecution for Americans hiding unreported offshore bank accounts. A new whistleblower program also began to pay dividends: in 2011, the IRS paid an accountant $4.5 million for tipping off the agency that his employer was cheating the American people out of $20 million owed in taxes. As the AP reported in December 2009, in its efforts to recover some of the nearly half-trillion dollars in revenue lost to cheating, the IRS was less likely to audit those earning below $200,000 a year:
IRS enforcement numbers, released Tuesday, show that returns under that amount have a 1 percent chance of getting audited.
Returns showing income of $200,000 and above have a nearly 3 percent audit chance. The percentage jumps to more than 6 percent for returns showing earnings of $1 million or more...
The number of audits jumped 11 percent from 2008 to 2009 for returns with earnings of $200,000 or more, but rose 30 percent for returns showing earnings of $1 million or more. For those under $200,000 the number of audits remained steady.
But just four short years later, the progress has started coming undone, thanks to a new wave of Republican attacks on the IRS budget. As the Washington Post reported last week, "As millions of Americans race to meet Tuesday's tax deadline, their chances of getting audited are lower than they have been in years." And as National Taxpayer Advocate Nina Olson and IRS Commissioner John Koskinen acknowledged with great regret, customer service has suffered greatly.
How bad have things gotten? Forty percent of calls to the IRS for help will go answered. The 60 percent they do get through have to wait 25 minutes on average, compared to just 10 minutes in 2010. In 2014, the agency provided in-person help to only 5.6 million people, compared to 6.5 million the year before. As Fierce Government explained in February, there is no secret as to why:
Fiscal 2014 IRS appropriations are $11.29 billion - almost a billion less than it was in 2010 and the fourth year in a row funding has declined, Koskinen told the House Appropriations Committee subcommittee on financial services and general government.
The IRS budget has been cut by 7 percent total over the last four years, he said, despite a 4 percent rise in total tax filings.
Cut, despite the testimony by Koskinen and Treasury Secretary Jacob Lew that for each additional dollar invested in the IRS, the agency will deliver $6 in new revenue. (Cut, too, despite the Republicans' endless repeated mantra that the United States is becoming like Greece, where tax noncompliance is essentially a national pastime.) As Koskinen summed up the impact of the cumulative effects of the House GOP's $600 million cut in 2011 and the 2013 budget sequester:
"If you gave us the $500 million of our sequester funds (slashed under automatic spending cuts) we would have given you back $2 to $3 billion more, and people shrug and move on," he said. The agency now employs 10,000 fewer people and receives $900 million less in federal funds than it did four years ago.
The last time the IRS analyzed the tax gap based in 2006 data, the agency concluded that the nation's 114 million households had to pay the equivalent of a "noncompliance surtax" of nearly $3,400 each. But with the taxpayer population now at 141.2 million, economist Benjamin Harris of the Brookings Institution estimated the total tax gap could range from $410 billion to $500 billion. "You could go a long way toward solving our budget mess by closing the tax gap," Harris said. "But the problem is, it's not easily closed."
Especially if, as Republicans demand, you don't even try.
As Bartlett notes, "Information reporting and withholding are the I.R.S.'s principal lines of defense against tax cheating," especially by small businesses, yet "previous efforts by Congress to do so have been met with huge political resistance." But those policy moves aren't as counterproductive as cutting the agency's ability to enforce the law at all. As Ezra Klein pointed out when House Republicans first slashed the IRS budget in 2011:
Converting dollar bills into $10 bills is an excellent way to pay off your credit card. Except, it seems, if you're a House Republican.
Especially if you're a House Republican trying to make hay over a supposed scandal involving the Internal Revenue Service's handling of 501c(4) political groups. As The Hill reported in July 10, 2013:
House Republicans are going on offense against the Internal Revenue Service with measures to slash the agency's spending and reform what they say has become a culture of abuse.
The House Appropriations Committee released a measure on Tuesday that would roll back the IRS budget by $3 billion -- a cut of roughly a quarter -- in direct response to the agency's targeting of tax-exempt groups.
Such a step, which even Charles Krauthammer called "silly and small," would make Uncle Sam's tax gap dramatically worse. But for today's GOP, that's no problem. As IRS chief Koskinen recently warned Congress, "I have not figured out either philosophically or psychologically why nobody seems to care whether we collect the revenue or not."
And that's the real scandal.
(This piece first appeared at Dailykos.)