IRS funding: Don’t feed the mouth that bites you

The House of Representatives voted Monday to rescind $72 billion of supplemental Internal Revenue Service (IRS) funding enacted by the previous Congress. Most of that funding is currently reserved for expanded audits and other enforcement activities. The Family and Small Business Taxpayer Protection Act, if signed into law, would keep only $8 billion of the recent $80 billion boost in the IRS’s 10-year budget. Specifically, the bill would retain the portion dedicated to taxpayer services and business systems modernization.

This legislation is very unlikely to pass the Senate, let alone get President Biden’s signature, so the IRS will keep its supercharged budget for now. However, that the first legislation of the 118th Congress was a bill to strip the IRS of its new funding is a testament to the deep unpopularity of the agency. An October Gallup poll showed that Americans rate the performance of the IRS as the worst out of 11 federal agencies listed.

The IRS’s poor reputation is well-earned. It has allowed vast troves of taxpayer data to leak, promulgated needlessly convoluted regulations, targeted conservative non-profit groups and subjected countless Americans to intrusive audits by overzealous examiners. Americans are right to be wary of giving the agency more resources. It’s bad enough when the federal government spends tens of billions of taxpayer dollars on services Americans don’t need. It’s worse when Americans must pay to boost funding of “services” like more audits and litigation.

Americans should be especially wary because of the sheer volume of new funding the IRS will receive. By 2030, this windfall will add an additional $14.3 billion annually on top of the agency’s regular appropriations, which stood at $12.6 billion in fiscal year 2022. Even former IRS Commissioner John Koskinen (an Obama appointee who had previously called for more funding) has suggested this doubling of the IRS budget is overkill, stating in an interview, “I’m not sure you’d be able to efficiently use that much money. That’s a lot of money.”

If the level of new funding is inefficient from the government’s perspective, it’s much worse for families and small businesses in the real economy. When D.C. insiders and technocrats refer to the expected return on investment of IRS funding, they’re talking about the ratio of additional tax collections per dollar the IRS spends. If the extra tax collections outweigh the new IRS costs, then that means there’s a net increase in money the rest of the federal government can spend. But all that money comes out of the pockets of taxpayers one way or another. And since the IRS will be casting a wider net (instead of targeting limited resources on the most dubious returns), a larger share of the audit burden will land on honest taxpayers.

An accurate accounting of the cost borne by Americans from the new IRS funding would also include the untold millions of additional hours taxpayers will spend navigating audits. It would account for the lost productivity from funneling 87,000 more Americans into jobs at the IRS, not to mention the countervailing surge of accountants and tax lawyers in the private sector who will go to work on behalf of taxpayers. Instead of creating, innovating and providing valuable goods and services to make Americans’ lives better, auditors, accountants and lawyers will go back and forth in zero-sum tax battles.

To be sure, the IRS isn’t principally to blame for this situation. Congress wrote the broken tax code that lays the groundwork for this unnecessary drain on Americans’ wallets. The 6,979 pages of tax law and more than 17,000 pages of IRS regulations are an administrative and compliance nightmare, especially for small businesses. The solution isn’t to add more auditors. The solution is a simple, clear and coherent tax system.

Simplifying the tax system and downsizing the IRS would be a huge win for Americans. But getting to a simple, clear tax system is easier said than done because certain concentrated interests benefit from the status quo. That includes industries and interest groups clinging to generous tax subsidies, as well as lawyers and tax professionals making a good living from their knowledge of the intricacies of the tax system. As the saying goes: Don’t bite the hand that feeds you.

Instead, the American people will be left feeding the IRS.

Preston Brashers is a senior policy analyst specializing in tax policy at The Heritage Foundation’s Hermann Center for the Federal Budget.