Study: IRS funding cuts lead to billions in lost corporate tax revenue

The IRS could have brought in billions of dollars more in corporate tax revenue if it had a bigger budget, according to a new study.

“You may save a little by cutting the IRS budget, but you are losing more in tax revenues,” said Casey Schwab, a professor at Indiana University’s Kelley School of Business.

The study, which was accepted by The Accounting Review, was conducted by Schwab, Indiana University professor Bridget Stomberg, Michigan State University professor Michelle Nessa, and Erin Towery, a University of Georgia professor who is also an academic research consultant to the IRS.{mosads}

The IRS’s budget for fiscal 2019 is $11.3 billion, which is lower than the peak funding level in fiscal 2010.

The new study examined confidential data about audits of large, publicly traded corporations’ returns. The returns were for the 2000 to 2010 tax years, and the audits of the returns were initiated between 2002 and 2014.

Based on the analysis, the researchers found that if the IRS had been given an additional $13.7 billion in resources, it could have increased collections from large corporations by $34.3 billion. That amount is about 19.3 percent of the estimated “tax gap” between what corporations owed and what corporations paid from 2002 to 2014.

“These estimates should be of interest to Congress when deciding the amount of resources to allocate to the IRS,” the researchers wrote in their paper. “Our findings are particularly relevant given that any resource constraints the IRS currently faces will be magnified by the increased responsibilities it will have as a result of recent tax reform.”

The researchers found that when the IRS has fewer resources, it proposed fewer and smaller deficiencies during audits. However, the IRS also collected a larger proportion of the deficiencies they proposed. 

Schwab said the researchers interpret this finding to mean that when the IRS has less money, it continues to challenge corporations in areas where their positions are less easy for them to defend. 

The paper comes after the IRS saw its budget slashed in the early part of the decade.

Some Republicans said they wanted to target agencies that were inefficient. GOP lawmakers also expressed discontent with the IRS at the time, after a Treasury Department watchdog found in 2013 that the agency had subjected conservative groups’ applications for tax-exempt status to extra scrutiny.