Scott A. Hodge, the president emeritus and senior policy advisor of the Tax Foundation1 wrote a very thoughtful piece on the new IRS budget2 created by the recently passed Inflation Reduction Act.3 It is truly one of the saner analyses that has been offered in this debate, and I highly recommend everyone take the time to read it. I would like to add my voice to the debate by using Mr. Hodge’s article as a base. The following quotes are from this article, followed by my comments. I understand selecting quotes from an article risks the reader taking the quotes out of context. That is not my intention and I strongly encourage reading the entire outstanding article before continuing here. The purpose of using selected quotes is only to preserve brevity in this article. “The Internal Revenue Service (IRS) was one of the biggest winners in the recently enacted Inflation Reduction Act (IRA). The new law approved roughly $80 billion in additional IRS funding over the next 10 years. This will boost the IRS budget from around $12 billion per year to roughly $20 billion, a 66 percent increase.”

It is extremely difficult for any organization to undertake such dramatic growth in such a short period of time. How will the IRS manage such growth? Can its administrators handle such an increase in the number of employees and the resulting overhead? As we shall see, past history might indicate no.

“Critics make a fair point that IRS funding has seen very little, if any, real growth in many years… after adjusting for inflation, the IRS budget has been basically flat for the past two decades. The IRS budget was $13.7 billion in 2021. In inflation-adjusted terms, this is roughly the same level it was in 2012 and 2002. Meanwhile, the U.S. population has grown by 7 percent since 2010 and 17 percent since 2000. Funding has certainly not grown as the population has grown.”

This is a good first approximation of the IRS budget situation. However, is population growth the correct metric to judge the IRS budget? I would argue no. This could ignore the cost structure of an organization. For instance, many IRS costs are fixed costs or at least step costs.4 For instance, there is only on Commissioner, one Deputy Commissioner, one General Counsel, one headquarters building, etc. I would be very

interested in seeing such an analysis before I would agree that the IRS budget should grow in lockstep with the American population.5

“Because too many IRS employees are doing menial tasks, such as keystroking paper tax returns, they have too few employees answering the phones. According to the NTA (National Taxpayer Advocate) report, during the 2022 filing season, the IRS received 73 million phone calls for assistance. An IRS employee answered just 10 percent of those calls, or 7.5 million. Better technology and more customer service employees would certainly help address this problem. But so would a simpler tax code.”

There is no disputing this situation or the proposed solution of a simpler tax code. However, it is my belief that its complexity and its accompanying myriad of regulations, revprocs, TAMs, etc. will only grow due to the complexity of the American economy. For example, look at the growth in virtual currencies and NFTs. This has spawned a whole series of new IRS efforts and publications. The very inertia built into the methodology of changing the tax code itself also hinders “reform”. 6 Look at the efforts of the Trump Administration to simplify the tax code and how that ended up.7

“The growth in individual e-filers has been even more rapid, no doubt because of the availability of commercial tax preparation software. Although the IRS did not separate individual returns from the total in 2000, we can see that by 2005, more than half of all individual tax returns were e-filed. The number of e-filers grew to 86 percent over the next decade, and now stands at 90 percent.”

This is a critical point. The IRS does not need to have the same number of employees now as it did in 2000 which is why the growth in the American population may not be the best measure of the IRS budget. The legendary legion of IRS employees manually loading tax returns into the IRS databases isn’t needed anymore. The explosion of tax preparation software and the requirement tax preparers file returns for clients electronically has substantially reduced the IRS burden.

“In 1991, as the table below illustrates, it cost the IRS .56 cents to raise $100 in tax revenues. Despite the dramatic decline in IRS staffing and the lack of real growth in theIRS budget, it now costs .33 cents to raise $100. That amounts to a 40 percent increase in productivity.”

This increase in productivity sounds very impressive until you look at the general increase in productivity in the American economy. The Bureau of Labor Statistics reports productivity gains of the American laborer since 1994 has grown 48.5%. 8 The growth in productivity would be even larger if you were to add in three additional years at the beginning of the decade. Mr. Hodge pointed out earlier in the article the IRS had underinvested in technology, one of the most important reasons productivity grows over time. This brings me back to my earlier point: how efficiently will the IRS use its budget growth? Will it invest in the required technology, or will it simply add new employees despite potential diminishing returns?9. Given the fact the IRS has not been efficiently managed in the past, one has to wonder if the current administration will make the necessary adjustments to its management model.

“Clearly, the IRS is doing more with less. Unfortunately, the Inflation Reduction Act has focused more of the $80 billion to enforcement and hiring more auditors rather than programs that make it easier for taxpayers to comply with the code and the IRS to administer it. If, for example, the IRS made use of commercial scanning technology to input paper returns into the system, they could redeploy thousands of people to actually helping taxpayers. In other words, put the “service” back into the IRS.”

Unfortunately, Congress doesn’t seem to understand some of the key issues plaguing the IRS. It has concentrated funding on enforcement rather than updating the IRS technology and procedures. How effective will that be? I will save that for another article.


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