Throwing Money at the IRS Won't Fix Its Problems

Can the government turn $80 billion into $204 billion? Probably not.

There is something irresistibly appealing to certain politicians about the idea of giving more money to the IRS. Like the king in "Rumpelstiltskin," they thrust fistfuls of straw at the tax collection agency and demand that it be spun into gold. Also like the king, they do not care to look too closely at where exactly the gold is coming from, or at what eventual price.

In August, the Inflation Reduction Act allocated $80 billion in new funds to the IRS. A massive sum, but one carrying the weight of outsized political promises: Enough to hire 87,000 workers, increase the agency's enforcement budget by 69 percent, and surgically punish rich tax cheats yet somehow leave small businesses and everyone who earns less than $400,000 a year unmolested—all while raking in a hefty return in federal revenue by closing the "tax gap" created by evasion.

The Congressional Budget Office (CBO) did indeed estimate in 2021 that $80 billion in new spending under terms floated by President Joe Biden would bring in $204 billion in new revenue. A 250 percent return sounds like a pretty good deal, but $80 billion isn't the real price and $204 billion won't be the real return.

Those hypothetical hundreds of billions are supposed to come from people who, for the most part, do not want to part with them. Nobody likes paying taxes, and everyone would like to pay as little as possible when they do. Following the same logic as the government itself, taxpayers are willing to spend some money to improve their bottom line. Rich people can afford pricey lawyers and accountants. Less well-off people spend money on tax minimization, too; that is the selling proposition of H&R Block.

The burdens of tax compliance for individual taxpayers and small businesses come to $74 billion annually, according to calculations by the Tax Foundation. Add to that a burden of more than $60 billion on corporate entities just to comply with their income tax returns. Expanding enforcement is a great way to be sure those figures grow, swelling the true cost of that new federal revenue in the process.

The increased threat and incidence of audits is the primary vector by which the $80 billion is supposed to turn into $204 billion. But there is a great deal of uncertainty in that estimate. This is partly because the IRS is already plucking and gobbling the lowest-hanging fruit; previously marginal cases assigned to new revenue agents are likely to require more work for less reward. And those new workers may not be as capable as their more senior colleagues. As the CBO puts it: "The IRS intends to hire mid- and senior-level people with private-sector experience who will not require a great deal of training to become productive. But it might not be able to hire its desired mix of candidates."

Do you know who else will want to hire mid- and senior-level tax professionals with experience if tax enforcement starts to ramp up dramatically, especially on the well-off? The folks on the other side of every IRS audit battle. And they typically pay better than the government can manage, even with an additional $8 billion a year on top of the agency's existing $14 billion budget.

In other sectors, H.R. problems can be mitigated by good tech. Not so at the IRS. The IRS has been failing to modernize its computer systems for as long as there have been computer systems. In 1982, The New York Times ran a story lamenting outdated 17-year-old equipment at the agency and touting a plan to "modernize" by bringing in a "computerized microfilm research system" by 1985. Yet the agency did not treat this as a priority, and it still doesn't: Of the new money the IRS is getting, just 5.75 percent is marked for modernizing the system.

Meanwhile, predictions about closing the nation's already relatively small tax gap—when tallying tax evasion as a share of GDP, the U.S. sits between Japan and the Netherlands—have a long, proud history of underestimating the effort Americans will put into not paying more taxes.

When Barack Obama's administration tried to pick up some extra cash by requiring Americans to report on the money held in overseas accounts, for example, the Joint Committee on Taxation estimated that it would produce approximately $8.7 billion in additional tax revenue over 11 years. Instead it pulled a measly $250 million a year, less than a third of the estimate.

And in fact, a mere nine days after Biden signed the law increasing IRS funding, the CBO released a revised estimate, reducing anticipated revenues by $23 billion in response to last minute political strictures placed on the use of the funds.

The bill's supporters are right about one thing: For the last several years, the IRS has backed off audits on the wealthy.  In response to reduced funding, the agency chose to prioritize hiring cheaper, lower-skilled tax examiners instead of revenue agents. Recipients of the earned income tax credit are frequent targets, because eligibility for that credit is easy to get wrong. The poorest participants in the tax system—people who are eligible for a credit purely by dint of earning so little—are being audited at a rate five times higher than for everyone else. Over half of the agency's quick and dirty "correspondence audits" were done on people in this category, who typically earn less than $25,000 a year.

This is the reality of where that $80 billion will go. Even with the best of intentions to snack on the rich, the state always ends up feasting on the poor and the middle class. They know, as the infamous bank robber Willie Sutton almost certainly didn't say, that that's where the money is.

If virtually everyone could be a tax cheat, then selective enforcement is a natural result, no matter how many employees work for the IRS. Conservative fears that this selection will be guided by ideology may well be warranted. But a far more powerful force may simply be the quality of people the IRS can convince to come work for them, and the work they can feasibly get done. The CBO estimates that even an experienced hire would likely take 30 months to start generating revenue. A more junior person would take even longer to bring in money, and will be more of a drain on current employees to train in the meantime.

All this is flatly at odds with the administration's promises that only the wealthy will be subject to increased scrutiny. Significantly, attempts to enshrine those promises in the bill were shot down: The House version of the legislation contained a line saying "nothing in this subsection is intended to increase taxes on any taxpayer with a taxable income below $400,000," but that failed to make it into the final text. The post-passage update from the CBO emphasized that putting such language in the bill would have further suppressed earnings projections, which is tantamount to an admission that lower earners will see at least some increase in enforcement.

In the end, this money will not be used to create the "Democrats' new army of 87,000 IRS agents" of California Republican Rep. Kevin McCarthy's fever dreams. Of the agency's current employees, the fact-checkers hastened to inform us, only 2,200 are special agents authorized to carry firearms as part of their work.

But when you're reassuring a concerned public that "only" 2,200 of the tens of thousands of federal agents they are worried about have guns, you may have made a wrong turn somewhere.

Even if all of that enforcement money were somehow spent in a way that delivered on its backers' promises, it would still be good money thrown after bad. The U.S. tax code is famously complex and poorly administered. If the goal is for the feds to net more cash—setting aside for the moment how noble or advisable such a goal might be—there are better way than to chase expensive, evasive dollars. It's time to put a foot down and call the problem by its true name.

Employees of the IRS, even at the highest level, do not have any authority to do the thing that would most dramatically increase their productivity: simplifying the tax code. Congress does have that power. Would it be better to spend tens of billions of dollars to hire tens of thousands of staffers to hunt down some of the most difficult-to-pin-down money in America, or would it be better to simplify the system? The question is not one our politics are built to ask, much less answer.

Instead, our politics are designed to see a problem, throw money at it, and declare it solved. The IRS has been tasked with an impossible job, and no amount of additional funding can fix that.