A heavier burden for a weaker IRS

This Aug. 19, 2015, file photo, shows the Internal Revenue Service Building in Washington. The tax overhaul bill has yet to be passed at this point. But if it does, those changes will take effect in 2018.
This Aug. 19, 2015, file photo, shows the Internal Revenue Service Building in Washington. The tax overhaul bill has yet to be passed at this point. But if it does, those changes will take effect in 2018. AP

Republican lawmakers in Washington have spent the past month talking about cutting taxes. What they should also be talking about is collecting taxes.

Whether tax cuts will help an already strong economy is doubtful, but there’s no doubt that revenue lost through tax fraud or exploiting flaws in the tax code hurts the federal government and is unfair to taxpayers who pay all that they owe. Now the job of enforcing compliance with the GOP’s overhauled tax code – including changes that will invite more people to game the system – falls to an agency hobbled by Republican funding cuts, the IRS. Revenue lost for lack of enforcement will drive up the cost of a tax cut package already expected to cost $1 trillion over the next decade.

Congress under Republican control has repeatedly cut the IRS’s budget. The cuts weren’t done for any rational reason, but rather to punish the IRS for what Republicans imagined was its unfair scrutiny of conservative groups seeking tax-exempt status. An Inspector General’s report in October found the scrutiny was applied to liberal groups as well, but by then the damage had been done.

Republicans may have truly thought the IRS had applied an unfair standard to conservative groups, but cutting the resources of the agency that collects 90 percent of the government’s money was far more injurious to the nation than anything an IRS worker might have done. And it’s likely that the IRS’s supposed misbehavior was simply a cover for those Republicans who hate paying taxes and actually admire those who outwit the tax code. Recall that Donald Trump said during the campaign that he paid no taxes “because I’m smart.”

IRS workers cuts

Since Republicans took control of the House in 2010, the IRS has lost about 20 percent of its full-time workers, including about one-third of the compliance staff who enforce the tax laws. The Washington Post reports that the number of audited individual tax returns is at its lowest point in 14 years and criminal investigations of tax fraud have dropped by more than a third during that same time. In addition to its weaker policing, the IRS also was hobbled in providing services to taxpayers who had questions or needed help. Callers to the IRS experience long waits. Sometimes the calls are never answered.

Now the GOP’s tax overhaul – created in a mad rush and effective next month – has handed the IRS the job of absorbing major tax changes on short notice and overseeing tax collection in which the changes invite more people to dodge taxes.

Former IRS chief John Koskinen, who endured a ridiculous call for his impeachment from Congressional Republicans, said before stepping down in November that weakening the IRS’s ability to enforce compliance has an astronomical cost: “A 1 percent drop in the compliance rate translates into a revenue loss of over $30 billion a year.”

A shift to tax shelters

The tax overhaul allows so-called “pass-through” businesses, which comprise about 95 percent of the businesses in the U.S., to deduct 20 percent of their qualifying business income. These business are not corporations. These businesses are entities such as sole proprietorships and partnerships where profits are “passed through” and reported on the owner’s individual tax returns. Republicans say the change will extend the tax cuts that help big corporations to small businesses.

What the change also does is allow earners who were previously taxed at individual rates to organize as a pass-through business to shield 20 percent of their income from taxes. Meanwhile, the big cut in the corporate tax rate from 35 to 21 percent, will encourage more taxpayers to use corporations as tax shelters.

Whether these changes in tax status comply with the law will be up to the weakened IRS to determine. Certainly the agency will miss a lot. The resulting inequity will further undermine faith in a tax system that relies on a public perception that taxes are fairly imposed and every citizen is not only legally but morally obligated to pay what they owe. And it will, of course, create broader inequities between citizens.

As congressional Republicans take their bows for passing a costly and hastily drawn tax overhaul, they also should acknowledge that they need to repair the damage they’ve done to tax collection.