Clint's Window: Downsizing the IRS (8/26/96)

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	Does Anyone Win If We Downsize the IRS? Clint's Window by Clint Stretch, Director Tax Legislative Affairs, Deloitte & Touche LLP August 26, 1996

Congress, not the IRS, is responsible for a complicated tax system.

The Internal Revenue Service is a popular target these days, and many call for its drastic downsizing. One of the biggest applause lines in politics today is that it’s time to eliminate the IRS as we know it.

This summer, the House approved a plan to dramatically cut funding -- by over 10% -- for the IRS for fiscal 1997. Ten percent may not sound like a lot, but remember that each year Congress adds new laws and the number of taxpayers grows. The way these cuts are targeted, IRS computer modernization would virtually collapse. The Senate has not voted on IRS funding yet, but its Appropriations Committee also wants to cut the IRS budget by 6%.

This raises a few questions. Is the IRS really to blame for the current mess? If the IRS’s budget is cut severely, will the situation for taxpayers improve? Will taxpayers feel better?

Our answers start with the view that at a bare minimum, the government needs a tax collection agency that can:

Answer taxpayer questions.
Process returns.
Give guidance on how to comply with tax laws (write regulations).
Attempt to catch tax cheats and otherwise enforce the laws.
Collect the revenues that fund the government.

The cuts the House is proposing for the IRS budget -- slashing the Tax System Modernization program, eliminating electronic filing of tax returns, scaling back programs to catch people who don’t pay their taxes -- are not particularly helpful to taxpayers. If the point is to punish the IRS, taxpayers may end up suffering themselves even more. These proposed cuts fail to address the real problems of our tax system.

Directing Responsibility

Are taxes too high? If so, cutting the size of the IRS won’t improve things. Congress sets the level of taxes, not the IRS.

Can the IRS help you understand the law? One of the biggest complaints people have about our tax system is that they can’t understand what the tax laws say. At the same time, they feel that the IRS treats innocent taxpayers as criminals for inadvertently misapplying these complex laws. GOP Presidential candidate Bob Dole latches onto this frustration in his economic plan. He calls for drastic cuts in the size and scope of the IRS, while at the same time requiring "IRS employees to help taxpayers understand the law, (and) not punish them for misapplying it." Cutting deeply into the IRS will not help it address this fundamental taxpayer complaint.

Is the law too complex? It’s wrong to blame the IRS alone. Some complexity of the system is set by law. Again, Congress -- not the IRS -- is responsible for that.

For instance, the IRS has a 17-line worksheet for computing the tax that high-income Social Security recipients owe. Because of the incredibly complex way the law is written, it’s not possible to make the form shorter or simpler. It merely paints the picture of how the law is written, but the IRS didn’t write the law.

Do we really want simplicity? Our reaction to the complexity of taxes often depends on where the complexity takes us. If by filling out a two-page form, I can save substantial taxes, I don’t think that’s too complex. But I sure don’t like those complex forms that add to my tax bill.

Do we really want to end IRS enforcement efforts? From a revenue perspective, cutting the IRS without simplifying the tax code is like firing a bad cook. It might be a good idea, but if you can’t cook and don’t have a replacement lined up, you risk going hungry. From a compliance perspective, it’s like setting a speed limit, but posting a sign that says, by the way, we have no state troopers. You hurt the honest drivers by letting the abusers go unchallenged.

The Proper Improvements

No one doubts that our tax system needs many improvements. Even the House Ways and Means Committee acknowledged in a letter to a House appropriations subcommittee (which first pushed the budget cuts) that some downsizing is necessary, and the IRS needs to redirect resources to front-line operations, minimize overhead, and eliminate waste.

The committee added, though, that the proposed funding cuts "will seriously impair the IRS's ability to perform its core responsibilities," such as processing tax returns, answering taxpayer questions, and collecting tax revenues. The committee specifically warned that the cuts create a significant risk of substantial revenue losses and an increased federal budget deficit.

This IRS budget battle is being ignored because most people think the IRS budget will be set in a "continuing resolution" at the end of Congress. But, that resolution also may contain deep IRS cuts.