Could a Resource-Strapped IRS Handle Tax Reform?

As Republican leaders in Congress work to push through a major tax overhaul before year’s end, there’s no indication they intend to reverse a six-year trend of funding cuts for the very agency that would have to implement their tax plan: the Internal Revenue Service.

The $11.1 billion IRS budget being considered for fiscal 2018 represents a $110 million cut to the agency, reducing funding to 2008 levels. Many in the GOP seem to view the IRS as little more than a politicized relic of the Obama administration.  

Republicans have not always viewed the tax service that way. When President Reagan worked with congressional Democrats over the course of two years to produce what became the landmark 1986 tax reform, more lawmakers bought the argument that the “IRS is the only major revenue-raising agency in the country, and each dollar added to the IRS budget produced a budget return at that time of $5-7,” former Internal Revenue Commissioner Lawrence Gibbs, now a senior counsel at Miller Chevalier, recently told Government Executive.

What’s more, if the GOP tax reform proposals become law, it will fall on the IRS, along with regulatory policymakers at the Treasury Department, to rewrite the tax forms and guidance taxpayers rely on, reprogram computer software to account for the changes, and train staff to enforce the new code.

Responsibilities v. Resources

“There is no higher IRS priority than implementing statutory mandates, whether or not they’re funded,” said recently retired Internal Revenue Commissioner John Koskinen. But while the agency would be able to implement tax reform, without additional funding it could very well come at the cost of degraded taxpayer services, compliance enforcement and critically needed computer modernization, he stressed.

A Government Executive canvass of lawmakers on the House and Senate appropriations and finance committees suggests that Congress has been more concerned with changing the tax code than with tending to the needs of the agency that would implement those changes.

Senate Finance Committee Chairman Orrin Hatch, R-Utah, “is focused on ensuring Congress will deliver a strong pro-growth tax overhaul to the American people and will work closely with IRS to make sure they can implement it,” said a panel spokesman. He pointed to a line in the legislation’s chairman’s mark declaring that “politically motivated budget cuts are counterproductive to deficit reduction, diminish the IRS's ability to adequately serve taxpayers and protect taxpayer information, and reduce the IRS's ability to enforce the law.”

A Ways and Means Committee majority spokesperson would say only that Chairman Kevin Brady, R-Texas, and other Republicans “look forward to working with the acting commissioner to ensure the IRS is properly administering the simpler, fairer tax code with a focus on serving taxpayers and protecting taxpayers’ rights.”

Senate Appropriations Committee Chairman Thad Cochran, R-Miss., according to a spokesman, believes “it would be premature to speculate what the final fiscal 2018 funding level will be for the IRS. Chairman Cochran hopes Congress and the administration will soon reach a budget agreement that will permit appropriators to complete fiscal 2018 bills and give federal agencies greater budget certainty,” particularly when it comes to providing IRS the resources to help taxpayers in rural areas, he said.

Rep. Nita Lowey, D-N.Y., the ranking member on the House Appropriations Committee, said through a spokesman that, while it’s hard to know before the final tax bill takes shape, the implementation challenges of the IRS are “certainly something we are very aware of. If we get to the point of negotiating a full-year omnibus [spending bill] including IRS funding, we will push to ensure any new needs are met.”

For all the passion Republicans are bringing to the debate about income distribution and corporate investment, those concerns for the most part don’t extend to the impact a massive tax code rewrite will have on an unpopular agency.

The draft reform bills “are not very well thought out,” said Leonard Burman, a founder and senior fellow at the nonpartisan Tax Policy Center who also teaches at Syracuse University. “People at the Tax Policy Center have been flagging all sorts of flies in the ointment, even when taking the bills’ ostensible purpose as valid,” he said.

“It seems to be a pattern for Congress in recent years to give the IRS huge additional responsibilities with no additional resources,” he added, giving the example of the tax agency’s relatively smooth roll out of procedures for implementing the 2010 Affordable Care Act. But the tax reform the GOP is pushing “is an order of magnitude more complicated than that.”

Investing in Revenue Collection

The IRS’s capacity to handle tax reform has largely escaped public notice. But in a Nov. 20 op-ed in the Wall Street Journal, philanthropy specialists Suzanne Garment and Leslie Lenkowsky expressed skepticism toward the proposal by many in the nonprofit community for a “universal charitable deduction” for itemizers and non-itemizers. They warned, in part, that it “would burden an already overloaded Internal Revenue Service bureaucracy with a greater number of returns requiring audits.”

The approach to tax reform by the Trump administration and the Republican congress stands in stark contrast to the approach President Reagan took 30 years ago. Following the 1986 tax reform, Reagan specifically asked for new hires at the IRS, first 5,000 and later 10,000 after the agency requested them, according to 1987 Government Accountability Office testimony. The agency saw its workforce rise from 102,189 in fiscal 1987 to 114,975 in 1988. Its staff would shrink back to 111,962 in 1990. (The IRS workforce at the end of fiscal 2016 was down to 76,219.)

Those 1980s funding hikes came after a decade and a half of stingy budgets, according to former Commissioner Gibbs, who worked for the tax agency in the 1970s and returned as commissioner in 1986. “Continually after 1969 until 1986, neither Congress nor the Office of Management and Budget were receptive to requests for increases in resources for work IRS would have to do to implement or carry out any legislation,” he said. “It was just a given that Congress would pass increasingly large bills and ask IRS to use whatever its budget was to carry out whatever Congress wrote.”

Originally Gibbs’ pleas for more funds fell on deaf ears. But influential writing by C. Eugene Steuerle, the current Urban Institute scholar who in the mid-1980s was the economic coordinator and original organizer of Treasury’s tax reform effort, helped Gibbs change some Reagan administration minds on the ability of the IRS to provide a revenue return on an appropriations investment.

The context also figured in Congress’s change of heart. In 1985, before Gibbs arrived, the IRS had run into problems with new computer software designed to help it process returns, pay refunds and update master files.

“Eighty million taxpayers didn’t get their refunds” on time, he recalled, noting extensive press coverage of the debacle. Because “constituents understood what it meant to have a problem at IRS, Congress was willing to provide additional funding,” he said.

But additional staff alone won’t solve the challenges of tax code complexity.

The Tax Policy Center’s Burman, who helped lead Treasury’s planning for tax reform in the mid-1980s, said the enacted bill “put a lot of demands both on IRS and Treasury staff. We had analyst meetings and high-level meetings [with the commissioner and Treasury’s assistant secretary for tax policy] trying to figure out how to implement the legislation, which frankly, was much better developed than the one now working its way through Congress.”

The current bills contain many landmines, in Burman’s view. He cited the “pass-through” tax breaks for self-employed business people that phase out at the higher levels. “The enforcement challenge is trying to monitor the boundary between legitimate business income and tax sheltering,” he said, noting that the incentives for taxpayers to present earnings as pass-through income rather than wages to qualify for a lower tax rate will be “magnified.”

In addition, the bills’ dramatic changes in international taxation, Burman said, “are very complex” and tough to interpret to keep policy fair and reduce opportunities for tax sheltering. Treasury “will need more resources and may even have to renegotiate treaties,” he said.

If tax reform passes, Gibbs said, the IRS, “in addition to the forms and publications changes, will have to spend substantial amounts on training temporary employees.”

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