IRS Missed Out on $34.3B in Revenue Due to Budget Cuts

Chris Gaetano
Published Date:
Aug 16, 2019
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A recent study calculates that the federal government would have had $34.3 billion in additional revenue if not for IRS budget cuts, according to Accounting Today. The study, undertaken by Indiana University's Kelly School of Business, used IRS audit data from 2000 to 2010 to measure the effect of IRS resources on the incidence and magnitude of proposed deficiencies and settlement outcomes.

The researchers found that IRS resources are positively associated with both the likelihood and magnitude of proposed deficiencies but negatively associated with the proportion of proposed deficiencies collected. These results are consistent with the IRS focusing on fewer positions but targeting positions supported by weaker taxpayer facts when resources are more limited.

"Based on our findings, we estimate the loss in tax collections from audits of [large business and international] corporate tax returns alone exceeds the savings from reductions in the IRS enforcement budget," said the study abstract.

The IRS has been subject to numerous budget cuts over the past decade. A GAO report noted that, between fiscal years 2011 and 2018, the IRS's budget declined by 15.7 percent ($2.1 billion), which hobbled its ability to enforce existing tax laws and implement new ones, like the Affordable Care Act or the Foreign Account Tax Compliance Act. The GAO added that these staffing shortages have also affected the IRS's ability to defend against identity theft and fraud.

The GAO report echoed what many have been saying about how ongoing staffing shortages have negatively impacted the IRS's enforcement capabilities, and how this has changed the agency. Individual audit rates, for example, have reached lows not seen since 2002 because there are fewer auditors than there were before. Beyond the actual number of audits, the staff shortages have also affected who gets audited: Enforcement actions against wealthy individuals and large corporations, which require more resources to audit, have dropped in favor of those against middle and lower income taxpayers.

The researchers acknowledged that prior studies have also shown that IRS budget cuts make audits less likely and less impactful, but they noted that this is the first one that has quantified the impact.

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