What champions of more IRS funding got wrong

On its first anniversary, Congress’ multibillion-dollar investment in the Internal Revenue Service is in serious danger. That’s partly because those of us who championed the cash infusion made a strategic error in how we sold it to the public.

A year ago, as part of the Inflation Reduction Act, Democrats gave the IRS an additional $80 billion. The money, to be spent over the course of a decade, was designed to reverse years of funding cuts that had left the agency hollowed out and unable to perform basic functions. We’ve already seen results, including better customer service (shorter call-waiting times, for instance), with more improvements planned. The law’s beefed-up funding for tax enforcement will also, over a longer time horizon, improve the country’s fiscal health.

At least, it should accomplish all these things … if it survives a GOP onslaught.

Republican politicians have spent the past year terrifying the public about this additional IRS money. They have falsely claimed that the money will be used to hire an “army” of 87,000 IRS agents to harass honest, middle-class taxpayers. The claim has been debunked many times, but Americans seem to believe it anyway and support clawing back the funding. Which Republicans are eagerly working to do — in some cases with Democratic cooperation.

Mostly this is a story about GOP fearmongering. But advocates of IRS funding probably made Republicans’ work easier.

In the lead-up to the Inflation Reduction Act’s passage, advocates of funding the IRS (including me) emphasized the benefits of spending more resources auditing high earners and corporations, whose audit rates had plummeted.

This pitch seemed to have both policy and political merit: Spending money on IRS enforcement offers a huge return on investment; cracking down on “wealthy tax cheats” also sounds like a pretty good way to marshal popular support. After all, for many years, Americans have told pollsters that their top complaint about the tax system is the perception that corporations and wealthy people don’t pay their fair share.

But no matter how often Biden administration officials have pledged that the additional enforcement money would be used to increase audit rates only of tax-dodging rich people, Americans still suspect that shallow-pocketed, lawabiding taxpayers will be targeted instead.

To be fair, this suspicion is not entirely unwarranted.

Audit rates of low-income households (specifically, those claiming the earned-income tax credit) are very high, more than five times virtually everyone else’s. These kinds of audits are cheap and easy for the IRS to do, relative to the complexity of millionaires’ tax returns.

Plus, roughly 1 in 10 audits of individual taxpayers in recent years has resulted in “no change.” This basically means the IRS didn’t find sufficient evidence that the taxpayer owed additional money.

Such outcomes indicate that the IRS wasted a bunch of resources with nothing to show for it. They’re also annoying for taxpayers who complied with the law but had to undergo expensive, timeconsuming exams anyway. If you’re among these “no-change” audit alumni, you, too, might doubt how well-targeted additional audits would be.

At some point, the Biden administration realized its enforcement-based pitch wasn’t registering with the public. It instead began emphasizing the law’s customer-service and IT modernization elements — basically, the ways the bill will help normal, already-law-abiding taxpayers. Things I support, too.

But the enforcement money remains critical to alleviating budget deficits and still needs a full-throated defense against GOP attacks. And I think there’s a better way to pitch it.

The key is explaining how IRS modernization and enforcement efforts are not really distinct goals. They are mutually reinforcing.

IRS technology is old and decrepit. Some of it dates back to the disco era; some, such as the continued reliance on microfilm (!), is even more ancient. This not only holds back the agency’s ability to process refunds and otherwise help compliant taxpayers. It also makes it much, much harder for IRS employees to determine whom to audit in the first place, and whether the taxpayer in question paid the right amount.

This is particularly a problem when returns are more complex and linked in complicated webs to lots of other returns — as, for example, with large partnerships, which today largely escape auditing altogether. Without better data and more digitization, IRS agents can have trouble determining what they’re looking at.

Upgrading the agency’s systems while hiring more sophisticated enforcement personnel can mean that fewer honest taxpayers (whatever their income) get pulled into the auditing dragnet. This would make enforcement efforts more efficient and more likely to recover money already owed — and, in the long run, reduce the need to raise rates on law-abiding taxpayers, who right now are having to make up the shortfall for their less scrupulous neighbors.

Many champions of IRS funding have talked about the need for more audits. Perhaps going forward, our message should be: Whether or not we have more audits, we definitely need better ones.