Losing billions to save millions

Losing billions to save millions

Years of budget cuts hinder IRS battle against organized crime

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IRS building in Washington D.C.

This year’s deadline to file federal tax returns with the Internal Revenue Service is today, April 18. That’s because the usual deadline of April 15 happened to fall on Emancipation Day, a legal holiday in Washington, D.C.

Yet the brief filing reprieve will not likely change the low regard the public holds for the IRS as a federal agency, nor among members of Congress who have been cutting its budget every year since 2010.

According to a 2014 survey the Pew Research Center, the IRS was the least favored of seven major federal agencies, including the CIA, NASA and the Veterans Administration. And the IRS was the only one to receive a higher negative rating, 48 percent, than positive, 45 percent. The Centers for Disease Control and Prevention was tops with a 70 percent favorable score.

The difference in ratings for the IRS is more pronounced by political party affiliation, according to respondents to the Pew survey. Among Republicans, only 30 percent had a favorable view of the IRS compared with 62 percent for Democrats. Perhaps that explains the mood of Congress, where Republicans hold majorities in both the House and Senate and therefore control committee chairs and votes on the amounts of money budgeted to the IRS.

Rich Weber, current Chief of the IRS Criminal Investigation division, speaking at the"Follow the Money" forum at The Mob Museum in Las Vegas, Thursday, April 16, 2015
Rich Weber, current Chief of the IRS Criminal Investigation division, speaking at the”Follow the Money” forum at The Mob Museum in Las Vegas, Thursday, April 16, 2015

The House, where all legislation for raising revenue must originate under the Constitution, has in recent years consistently passed bills reducing the funds appropriated to the IRS. Since about three-quarters of that budget is for employee salaries, the IRS has to reduce its personnel each year, according to the Center on Budget and Policy Priorities in Washington, D.C. The IRS has lost 10,000 positions, or 20 percent of its enforcement staff, due to budget declines since 2010.

The cuts to IRS keep coming despite the fact that the Treasury Department reports that each new dollar spent on enforcement brings in $6 in tax collections. The overall budget for the IRS fell by 10 percent to $10.9 billion in 2015. The drop in funds actually costs the government around $385 billion in lost tax collections per year, or what the IRS calls a “tax gap.”

“Essentially, the government is losing billions to achieve budget savings of a few hundred million dollars,” IRS Commissioner John Koskinen told the center last year.

The federal agency that put Al Capone in prison has persevered even as Congress has rejected requests for additional funding to upgrade information technology systems the agency uses to keep up with criminals who are becoming more sophisticated in hiding money. IRS officials complain that the agency’s computer operating systems are so out of date that the software company Microsoft no longer maintains them. The IT situation at the IRS led a frustrated Commissioner Koskinen to remark that his agency must employ “applications that were running when John F. Kennedy was president.”

The budget woes the IRS has endured were exacerbated by laws passed by Congress in 2010 that expanded its responsibilities, such as tracking credits taxpayers buy due to the Affordable Care Act and the requirements of the Foreign Account Tax Compliance Act, whereby American citizens must report the assets they have in offshore banks and foreign banks have to provide details on financial accounts held by Americans.

Ironically, the reduction in special agents working for the IRS Criminal Intelligence division comes at a time when they are needed more than ever. Mark Matthews, a former chief of the CI division and one-time deputy IRS commissioner, wrote in March that the IRS has seen a surge in identity theft cases – including thieves using the Internet to obtain tax refunds through fraud. And the growing international nature of its cases, such as the use of off-shore banks by tax evaders and money launders, has required the IRS to assign more CI station chiefs abroad.

According to Matthews, the number of CI agents has fallen from a high of 3,363 in 1995 to the current level of 2,288. The number of IRS criminal investigations has dropped from 5,314 in 2013 to 3,853 last year, with convictions falling as well, from 3,865 to 3,208, respectively.

The Internal Revenue Service's Criminal Investigative Division Chief Richard Weber speaks inside his office in Washington, August 14, 2014. Budget pressures at the division are cutting the number of investigators there to the lowest level in four decades, and officials say the changes are forcing the division to scale back its fight of financial crime. Weber in an interview said his goal is to get the number of special agents back up to at least 3,000. Picture taken August 14, 2014. To match IRS-ENFORCEMENT/BUDGET REUTERS/Larry Downing (UNITED STATES - Tags: POLITICS CRIME LAW BUSINESS) - RTR43N9A
The Internal Revenue Service’s Criminal Investigative Division Chief Richard Weber speaks inside his office in Washington, August 14, 2014. Budget pressures at the division are cutting the number of investigators there to the lowest level in four decades, and officials say the changes are forcing the division to scale back its fight of financial crime. Picture taken August 14, 2014. REUTERS/Larry Downing

The types of criminal cases the CI division encounters have expanded and grown more complicated as resources have declined. Of the 3,855 criminal initiations CI pursued last year, 776 were about identity theft, 955 had to do with narcotics and 1,436 involved money laundering. With its agents spread so thin and having to play a diverse number of roles, CI was left to prosecute only 1,202 cases of “traditional” tax fraud, which Matthews contends is “a dangerously low level.”

As for 2016, the IRS is expected to suffer additional budget reductions by the House Appropriations Committee, chaired by Republican Hal Rogers of Kentucky. President Obama’s proposals to reinstate previous spending levels have fallen on deaf ears, according to the Center on Budget and Policy Priorities. The projected funding reductions — $838 million in the House bill, $470 million in the Senate version — would bring the agency’s funding down to what it was in 1990.

Additional cuts in funding for the CI and other divisions of the IRS would only encourage more people to choose not to comply with tax rules, former CI division chief Matthews wrote.

“Too much is at stake,” Matthews said. “The maintenance of our still-laudable tax compliance rate is essential to our functioning democracy. CI (and a fully funded IRS) is a relatively small price to pay. If our compliance rate started to fall because of perceived lack of enforcement, it would be much more expensive (and painful) to restore the status quo.”

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