Here’s why we should all agree to adequately fund the IRS

Taxpayers and even some lawmakers who instinctively dislike the IRS should recognize the bum rap isn’t really fair to the agency. In fact, the IRS deserves some devotion in the new year.

The Inflation Reduction Act gives $80 billion to the IRS over 10 years, to remedy the not-so-secret fact that the agency has been severely underfunded for at least 12 years. In the world’s richest country, our tax authorities still rely — shockingly — on a paper-based system. The agency lacks the resources to upgrade its computers, update its systems, or employ the people to use those systems — or even to answer the phones. And yet, recent congressional proposals continue to falsely imply that most of an earmarked increase in IRS funds will be used to hire an army of agents, proposals that threaten to withhold or redirect the money.

In reality, most of the $80 billion will go toward replacing retiring employees and restoring the agency to an appropriate size. Today, the IRS headcount is only about 67 percent of what it was 30 years ago. Since then, the IRS has been asked to do much, much more for the U.S. government, with ever-shrinking resources.  

The new funding is also a crucial part of the plan to collect the money needed to fund federal programs. For example, most voters support the Inflation Reduction Act’s investment of $369 billion into climate change and clean energy tax incentives. These programs will be funded by money the IRS collects through enforcement of existing taxes and new tax provisions related to share buybacks and a minimum corporate tax on book income — additional taxes on large, publicly traded corporations that report big profits to shareholders but small taxable income to the IRS. And to do that, it will need more resources.

The minimum corporate tax on book income alone is estimated to increase tax revenue by an estimated $313 billion, almost enough to completely fund all the Inflation Reduction Act’s climate change and clean energy incentives. But the IRS will have to enforce this tax if it’s to generate revenue as expected. According to a 2022 IRS report, between 2010 and 2017, IRS audits of the largest corporations — those most likely to be subject to the new minimum tax on book income — declined by over 34 percent. In 2010, the largest companies had an 87 percent probability of audit; by 2017, that probability had dropped to only 56 percent — barely more than a coin toss.

Academic research finds that when the IRS has more resources, it audits more large, public companies and those audits uncover more and larger tax deficiencies. In fact, every $1 increase in the IRS enforcement budget is estimated to generate an additional $2.50 in tax revenue from large corporate taxpayers alone. A 150 percent return on investment should be a no-brainer to even the greatest proponents of small government.

To be sure, at least some of those clamoring to rein in agency funding are simply attempting to ensure that taxpayer dollars are spent efficiently. Indeed, much of the rationale for the IRS’s recent decline in funding rests on arguments that the existing budget level is “sufficient” and that the agency just needs to “better prioritize its budget.” These arguments imply potential inefficiencies within the IRS. Yet, the IRS is routinely classified as one of the most efficient tax administrators among OECD countries. And there are clear efficiency gains to be enjoyed from technology upgrades and sufficient personnel.

Despite the newly earmarked funds, the IRS budget is not safe. Rep. Kevin McCarthy (R-Calif.) has said the first item up for business when Republicans take control of the House in January will be to repeal the $80 billion allocation. Of course, President Biden likely would veto any such measure. But with control of the House, Republicans can reduce future annual IRS appropriations to offset funds the Inflation Reduction Act earmarked to the agency over the next decade. As the world’s richest country, do we really want the agency tasked with funding our government operations to be held together with Scotch tape and string?

Lisa De Simone is an associate professor of accounting at the McCombs School of Business and a Public Voices Fellow of the OpEd Project at the University of Texas at Austin. Bridget Stomberg is an associate professor of accounting at the Kelley School of Business at Indiana University. They co-host the podcast “Taxes for the Masses.”