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It’s a great time to cheat on your taxes

Rick Newman
Senior Columnist

If you don’t already cheat on your taxes, it’s an opportune time to start.

For the fourth year in a row, the Internal Revenue Service will be doing more with less when it audits 2014 tax returns, with the odds of getting audited falling to an 11-year low. Just 0.86% of individual tax filers are likely to get audited this year. In 2010, the odds were 1.11%. IRS Commissioner John Koskinen calls that change “a deeply disturbing drop in our individual audit rates.” The odds of wealthy filers earning more than $1 million getting audited have fallen from 8.4% to 7.5% since 2010. For big corporations, the odds of an audit are down from 16.7% to 12.2%.

Congress, which funds the IRS, isn’t explicitly telling Americans to dodge taxes, of course — but it’s making it a lot easier to do so. Funding for the tax agency has been cut by about 10% since 2010, as the chart below shows. The number of IRS employees has fallen by about 8% in that time.

The number of returns filed, meanwhile, has risen by 3.4%. The growing gap between workload and funding may not seem huge, but some analysts fear a tipping point is coming, with tax-collection problems bound to multiply. “I’m very concerned the IRS may actually crash,” says Michael Gregory, a former IRS supervisor who retired in 2011 after 28 years with the agency. “I have not seen a time when the IRS has been stretched to the point it is currently.”

Source: IRS, Dept. of the Treasury

The IRS isn’t the most popular government agency, needless to say, and Republicans in Congress have cut its funding in response to still-unresolved allegations that the IRS singled out conservative political groups while investigating possible abuses of tax-exempt status. But the IRS also collects about 90% of the government’s revenue, and handicapping the agency is a counterproductive move that will penalize taxpayers who play by the rules while making life easier for those who don’t.

Uncollected taxes

The IRS estimates that nearly $400 billion in taxes due to Uncle Sam go uncollected every year. That’s enough money to cover about two-thirds of the latest federal budget deficit. Tracking down all that money may be impossible, but it stands to reason that lighter enforcement means the “tax gap” will probably get bigger. Still, the Treasury Department, which oversees the IRS, says every $1 spent enforcing tax laws yields $6 in additional revenue to the government.

In recent testimony, Treasury Secretary Jack Lew told Congress that further neglect of the IRS could cause "serious long-term risk for the U.S. tax system." The U.S. isn't a banana republic yet, but it's worth pointing out that porous tax laws and epidemic levels of tax evasion are one of the principal reasons Greece is a bankrupt nation completely dependent on European overlords such as Germany. Not exactly a model of liberty and capitalism. 

President Obama’s 2016 budget request calls for an 18% boost in funding for the IRS, with much of the money used to modernize the agency’s outdated computer systems and hire more front-line auditors. It’s unlikely to happen. Republicans who control both houses of Congress tend to feel that if the IRS brings in less money, it will force the federal bureaucracy to shrink, satisfying the party small-government wing.

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That may be true, but weaker enforcement is also likely to benefit wealthy filers more than ordinary workers filling out a 1040 EZ form. Wealthy individuals and corporations can afford the lawyers and accountants best able to exploit loopholes and string along undermanned government auditors. Lower-income workers have access to far fewer tax dodges because most of their income comes from work rather than investments, leaving fewer loopholes to exploit. And IRS software that scans tax returns for red flags is more likely to spot an errant entry on a simple return than sneaky accounting buried on an addendum.

Beyond that, some lower-income filers make mistakes that look like fraud but aren’t, especially when claiming the earned-income tax credit, which can be complicated. The IRS in recent years has expanded its efforts to help filers who don’t have their own tax preparers, but now it’s cutting back on that help. In 2010, for instance, the typical caller spent 10.8 minutes on hold waiting for a live IRS customer-service agent. By 2013, the wait was 17.6 minutes, according to Treasury’s IRS Oversight Board. And since the IRS has cut its training budget by 90%, some callers say they don’t get effective help even when they get through to a live person.

For all the talk about reforming and simplifying the tax code, it’s actually getting more complicated, raising the burden on the IRS to keep up. Penalty fees levied as part of the Affordable Care Act, which go into effect for the first time this year, must be administered by the IRS. It will deduct penalty fees from tax refunds for filers who receive one, but it still hasn’t spelled out how it will collect fees from people who don’t get a refund. And the growing problem of identity theft often involves fraudulent tax returns that funnel refunds to criminals instead of the taxpayer whose identity has been stolen, robbing the government and taxpayer both. These are complicated problems that could compromise public trust in the IRS if there are any prominent screwups.

The IRS certainly needs effective Congressional oversight, which in the past has forced the agency to be less hostile and more helpful toward typical taxpayers. But starving the agency doesn’t serve honest taxpayers at all. Giving the IRS the resources to do its job would.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.