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IRS budgets cuts costing the feds billions of dollars

Where IRS is most likely to audit taxpayers

A decline in corporate tax audits stemming from a sharp decline in the IRS' budget is costing the U.S. government billions of dollars.

So finds a study to be published later this month in the trade journal "Accounting Review." Researchers said that cuts to the agency's budget between 2002 and 2014 resulted in a steep decline in the amount of corporate taxes it collected during audits.The IRS' budget fell by $13.7 billion over that 12-year period. But the amount of money the agency collected from large corporations fell by more than double that amount, the study indicates.

"When we look at the reduction in the budget, it's not even close to the [tax] money that they're losing," said Erin Towery, one of the study's authors and a professor of accounting at the University of Georgia.

The researchers estimate the IRS could have boosted the tax revenue it collected from large and global corporations by more than $34 billion if the money it lost to budget cuts had been put into enforcement. 

Proponents of IRS budget cuts argue that they force the agency to work more efficiently. But the study refutes that claim, Towery said. "We see a net decrease in revenues. It's mostly because they're auditing fewer returns. If you have fewer resources, you're still leaving money on the table. 

"Keep in mind, we're only looking at large corporations," she added. "This doesn't talk about individual audits, smaller corporation audits, partnership audits—all these other types of firms."

It's not only big companies that face a lower risk scrutiny from the IRS. Research out of Syracuse University earlier this year indicates that the rate at which the IRS audits millionaires has fallen by half since 2010. Just 3% of the highest-earning filers are audited. 

Meanwhile, a person who claims the Earned Income Tax Credit—federal aid reserved for low earners—is more likely to face an audit than someone making 20 times as much, a ProPublica analysis found.

Towery's study ends in 2014 to allow for the fact that audits for a given tax year can happen several years later. Since that year, the agency's budget has continued to fall. Staffing at the agency has dropped by about one-third since 2010

At the same time, more and more individuals and corporations are filing returns—just as the IRS finds itself putting extra funds toward updating its forms in the wake of the Tax Cuts and Jobs Act, the largest tax-law overhaul in three decades. 

Where might this lead? The researchers point to a quote from former IRS Commissioner John Koskinen: "[I]f the budget keeps being cut and the agency keeps being given more things to do, the IRS is simply not going to work."

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