Today is Tax Day, one of the sparingly few instances when the Internal Revenue Service pops onto the national stage. And perhaps that’s for the best: When the IRS is in the spotlight, it's rarely for a reason that would earn the agency a ticker tape parade.
According to a Gallup poll taken last year, the IRS is one of the least popular agencies in the U.S. government, with the percentage of the population saying that it is doing a poor job having more than doubled over the last decade. (Though it still ranks ahead of Congress in terms of job approval!) The poll shows that “62% of Americans say the IRS has more power than it needs and 60% say it frequently abuses its powers.”
It makes sense on a visceral level that the IRS is not beloved. After all, it’s main purpose is to collect revenue, i.e. taxes, which few find abject joy in paying.
But we should really be cutting the agency a break. Most of the reasons Americans hold the IRS in such low regard have nothing to do with the IRS and everything to do with Congress’ predilection for crafting terrible tax policy.
Who Is Targeting Who?
For starters, let’s look at a major reason for the IRS’ plummet in the polls last year: its so-called “targeting” of conservative groups applying for tax-exempt status. Congressional Republicans have made a cause célèbre out of the incident, even voting in the House Oversight Committee to hold former IRS official Lois Lerner in contempt. Democrats counter that the GOP’s crusade is just a witch hunt, highlighting evidence that some liberal groups also received extra scrutiny.
But the real problem is not who the IRS did or did not scrutinize; it’s the vague criteria Congress directs the IRS to apply to groups seeking tax-exempt status in the first place.
The IRS is supposed to grant tax-exempt status to organizations promoting “social welfare,” which is defined as “promoting in some way the common good and general welfare of the community." This explicitly “does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate.” However, “an organization may carry on lawful political activities and remain exempt … as long as it is primarily engaged in activities that promote social welfare.”
These guidelines raise all sorts of questions: What does “primarily engaged” mean? Is that 51 percent of time, money or resources going to non-election activites? Or a larger percentage? And what is “the promotion social welfare” anyway? Can’t the argument be made that engaging in politics is a way to promote social welfare, if an organization feels that certain politicians pushing certain policies would be beneficial to humanity?
In order to untangle this, the IRS tries to take into account “the amount of funds received from and devoted to particular activities; other resources used in conducting such activities, such as buildings and equipment; the time devoted to activities (by volunteers as well as employees); the manner in which the organization’s activities are conducted; and the purposes furthered by various activities.” An exact science, this is not.
Congress could have, at any time, written real rules to clear up the morass, but it hasn’t. In fact, when the IRS recently proposed new rules to clarify the whole messy situation, members of Congress freaked out.
Doing Less With Less
Adding to the trouble is that, in the wake of the Supreme Court’s ruling in Citizens United that allowed unlimited corporate spending on elections, the number of applications for tax-exempt status has significantly increased, doubling between 2010 and 2012.
The IRS has had to take on this extra workload – and face the simple reality that there are more Americans filing more tax returns – with fewer resources. As tax expert David Cay Johnston noted in Newsweek, “Last year the IRS budget worked out to $33.55 per American, a 20 percent reduction compared with 2002, even though the number of taxpayers has grown 11 percent.”
According to National Taxpayer Advocate Nina Olson, who leads an independent branch within the IRS that represents the taxpayer, the IRS has seen an 8 percent reduction in its budget over the last three years alone. Its workforce “has been reduced from nearly 95,000 full-time employees in fiscal year 2010 to about 87,000 in fiscal year 2013 … while the agency’s training budget was slashed from approximately $172 million in 2010 to about $22 million in 2013, an 87 percent reduction.” The number of positions at the IRS actually peaked in 1992, “after Republicans Ronald Reagan and George H.W. Bush supported steady increases,” as Bruce Bartlett noted in the Fiscal Times.
President Obama has, for years, proposed increasing the IRS’ budget to deal with its increasing workload. Congress has, instead, done the opposite. And Congress avoids any consequences for doing so; after all, no one ever lost their re-election bid for cutting the IRS budget. So the IRS has been dealing with more returns and more applications for tax-exempt status at the same time that it has seen its ranks and resources steadily decrease.
Adding some insult to injury, cutting the IRS budget doesn’t even make sense as a deficit reduction measure. The IRS estimates that every dollar spent on enforcement brings in $4 to $5 in revenue, while Johnston estimated that every hour spent on corporate tax enforcement bring in more than $9,000 in revenue. This year, the chances of an individual or business facing an IRS audit will be the lowest they’ve been in years. So Congress is cutting the IRS budget, and making the federal budget worse because of it, all the while making it harder and harder for the IRS to do its job.
Actually, Doing a Lot More With Less
But enforcement and dealing with a deluge of tax-exempt status applications are not the only new tasks with which the IRS has had to deal in recent years. First, it will play a substantial role in enforcing parts of Obamacare. But more importantly, Congress has made a habit of engineering spending programs via the tax code, under tax provisions known as “tax expenditures.”
Tax expenditures – which totaled $1.1 trillion in fiscal year 2013 – are, for all intents and purposes, spending programs; instead of the government giving a particular favored person or company money for doing something, a tax expenditure reduces that person or company’s tax bill when it meets a certain criteria.
Between fiscal years 1974 and 2004, the number of tax expenditures doubled, while revenue losses due to them tripled. And this is real money. As the Center on Budget and Policy Priorities noted, “just the federal income tax expenditures together cost more than Social Security, or the combined cost of Medicare and Medicaid, or defense or non-defense discretionary spending.”
Tax expenditures are appealing because, while they’re essentially spending programs, they can be sold by members of Congress as tax cuts. For instance, Congress wants to encourage homeownership, but instead of giving people money to pay their mortgages, homeowners get a tax break. Ditto for all manner of programs aimed at scientific and medical research, energy, fostering adoption, film production and on and on. Instead of the government "spending money" on these programs, it doles out tax breaks. But the result is the same: less revenue for the government and more money in the hands of whatever constituency benefits from the tax break.
Unlike spending programs, though, tax expenditures are not subject to the annual appropriations process, so they rarely get reviewed. Also, because doing away with them can be portrayed as a tax increase, they are much harder to get rid of than traditional spending programs. The last time Congress went back to systematically reform tax expenditures was in 1986. And all of them become the IRS' problem.
The IRS is obviously not a perfect agency. But if, as Justice Oliver Wendall Holmes once wrote, “Taxes are what we pay for civilized society,” then it is serving a vital function. And the agency shouldn’t be blamed for the fact that it is beneficial for lawmakers to push spending through the tax code while simultaneously cutting the budget of the agency tasked with overseeing that spending or that it is in the interest of members of Congress to have vague guidelines for “social welfare” organizations that allow more money to flow into elections unimpeded. The IRS is simply stuck making the best of a bad set of political realities that turn into bad policies.
In the end, it’s not that nothing in life is certain but death and taxes. It’s that nothing is certain but death and Congress messing up tax policy. So have some sympathy for the IRS. Oh, and don’t forget to pay your taxes.