Problems at the IRS

In its May 25, 2013 edition, The Economist has an article about the IRS scandal, which is entitled “Who Will Tame the Taxman?” The part that interested me was not the discussion of alleged targeting of conservative organizations by the exempt organizations group, but its summary of other problems the IRS lives with. I quote The Economist’s description of these problems at length:

By its own admission, the service the IRS provides to taxpayers has been getting worse. Last year, it failed to reply to correspondence within the time specified by its own rules almost half the time. Between 2004 and 2012 the proportion of calls on its toll-free line it managed to answer fell from 87% to 68%, and the average wait rose from 3 minutes to 17. This year it is doing even worse. On April 15th, the day tax returns are due, it only answered 57% of calls. That matters, since “voluntary compliance”, as opposed to chasing delinquent taxpayers, brings in more money at less cost. The IRS is also doing less chasing (although few will lament that): the odds of an individual receiving a full audit are now just 1 in 360.

Money is part of the problem: since 2010, the IRS’s budget has been cut by 8%, as has its staff. To help make the required savings, the IRS is shutting up shop on five days over the summer. By the end of the year it will also have cut its training budget by over 80%. As the Taxpayer Advocate, an ombudsman, points out, cutting the IRS’s budget to reduce the deficit is misguided, since the more the agency spends, the more money it brings in.

In spite of the shortage of manpower and cash, much of the IRS’s time is devoted to inconsequential tasks. In the case of the applications for 501(c)(4) status, it seems to have dwelt on the submissions of small, local outfits, while waving through those from much bigger national groups. A recent drive to root out fraud in claims for tax credits related to adopting children is barely worth the effort, complains the Taxpayer Advocate. The IRS audited 69% of claims for this credit, yet of the $668m taxpayers said they were entitled to in 2011, it disallowed only $11m, or 1.5%. Adoptive parents, it turns out, are not the sinister conspiracy against the public purse that everyone imagined.

Lawmakers write the loopholes

The main reason why Americans dislike dealing with the IRS is not, however, the bureaucrats’ fault. Congress keeps making the tax code more complex. It is now 4m words long, and has been changed over 4,000 times since 2001 (see table). Americans spend 6.1 billion hours a year complying with it—enough work to keep over 3m people employed full-time without producing anything. Nearly 90% of filers pay for help with their returns. The cost of all this is equivalent to 15% of the tax raised, the taxpayer advocate reckons. This too, is self-defeating, in that it discourages compliance.

Politicians from both parties have long talked about simplifying the code by eliminating credits and deductions and using the proceeds to lower rates dramatically. Committees in the House of Representatives and the Senate have been working diligently on just such a plan. The Republican-controlled House would like to reduce corporate and personal income-tax rates to 25%. Democrats would rather use some of the revenue raised to pay down the deficit.

Some congressmen speak of a “grand bargain”, in which Republicans concede revenue increases in exchange for cuts to government health care and pensions, but there is little sign that the leaders of either party are prodding lawmakers towards such a deal. Politicians usually balk at taking on the myriad vested interests which all ferociously defend their favorite tax breaks, says Bill Gale of the Brookings Institution, a think-tank. For that reason, he argues, “tax reform is always the bridesmaid and never the bride”.

The biggest problem IRS has is the incredible complexity of the body of law it has to administer. When I practiced in Texas I enjoyed getting problems associated with state taxes because I found that when I had a problem I could make a call and talk with someone at the office of the Controller of Public Accounts and found that invariably they were able to nail any question I had. IRS can’t do that. What is the difference? It is that the controller of public accounts had a small body of law to administer. Their people could understand it and administer it effectively. IRS will never be able to do that. The problems are too complicated. Unfortunately, as The Economist article points out, this is unlikely to change.

This creates huge frustration, which I have observed being vented by numerous members of congressional committees investigating the IRS piling on and taking cheap shots at former Commissioner Shulman. Congress has created the problems; it refuses to do any of the simplification that is so badly needed and it refuses to be in any way accountable for the mess it has created.