Increase Appropriations for the Internal Revenue Service’s Enforcement Initiatives
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
|Billions of Dollars||2019||2020||2021||2022||2023||2024||2025||2026||2027||2028||2019-
|Change in Outlays||0.5||1.0||1.5||2.0||2.5||2.5||2.5||2.5||2.5||2.5||7.5||20.0|
|Change in Revenues||0.3||1.1||2.5||4.1||5.8||7.2||8.1||8.6||8.8||8.8||13.8||55.3|
|Increase or Decrease (-) in the Deficit||0.2||-0.1||-1.0||-2.1||-3.3||-4.7||-5.6||-6.1||-6.3||-6.3||-6.3||-35.3|
Source: Congressional Budget Office.
This option would take effect in October 2019.
Because of the budget scorekeeping guidelines used by the Congress, the revenue changes attributable to this option would not be counted for budget enforcement purposes. However, if an appropriation bill or another bill providing funding for this option is enacted, CBO's next projection of the budget deficit would incorporate its effects on revenues.
In 2018, the Internal Revenue Service (IRS) received appropriations totaling $11.4 billion—about 20 percent less than it received in 2010, when appropriations for the IRS reached their highest level from 1998 through 2018. (To compute that percentage change, the Congressional Budget Office converted the dollar amounts to 2018 dollars to remove the eﬀects of inﬂation. For personnel costs, inflation was measured using the employment cost index for wages and salaries of private industry workers; for all other spending, the measure of inflation was the chain-type price index for U.S. gross domestic product.) Since 2010, the biggest reductions in the IRS's appropriations have been in funding for enforcement (although enforcement still received the largest share of funding—43 percent—in 2018). The reduction in enforcement funding has coincided with a drop in audits: The percentage of tax returns audited declined from 0.9 percent in 2010 to 0.5 percent in 2017.
Increasing the funding for the IRS's enforcement initiatives (often referred to as program integrity initiatives)—activities, such as expansions of audits and collections, that could improve compliance with the tax system—would, in CBO's estimation, cause federal revenues to increase. Because of the budget scorekeeping guidelines used by the Congress, those additional revenues would not be counted for budget enforcement purposes. However, if an appropriation bill or another bill providing increased funding for program integrity initiatives is enacted, CBO's next estimate of the budget deficit would incorporate the effects of that provision on revenues.
This option would increase the IRS's funding for enforcement initiatives by $500 million in 2019. Those new initiatives that began in 2019, which would increase the number of audits of both individuals and businesses and enhance collection actions, would remain in effect through 2028 and beyond. From 2020 through 2023, the option would raise the IRS's appropriations for audits and collection actions by additional amounts, in annual increments of $500 million. From 2024 to 2028, the increase in appropriations for enforcement activities would remain at $2.5 billion. As a consequence, the appropriation for IRS enforcement would be over 35 percent higher in 2028 than the amount projected under current law, in CBO's estimation. Like the initiatives that would begin in 2019, new initiatives in each year over the next decade would remain in effect through 2028 and beyond.
Effects on the Budget
CBO estimates that the option would raise revenues by $55 billion from 2019 through 2028. On net, accounting for the total increase to the IRS's appropriations over that period, which would equal $20 billion, the option would reduce the deficit by $35 billion. Those estimates include only the revenues received by the IRS during the 10-year window; the estimates exclude taxes owed by taxpayers as a result of audits conducted through 2028 but not collected by the IRS until after that year.
To implement a new initiative, CBO anticipates that the IRS would have to hire and train new staff (and possibly provide more training for current personnel) and modify its computer programs. Therefore, in CBO's assessment, the new compliance initiatives would not be fully implemented until they had been in effect for three years. As a consequence, the return on investment (ROI)—the increase in revenues resulting from an additional dollar of appropriations—would increase gradually over the first three years an initiative was in effect. For example, CBO projects that the ROI for the 2019 initiatives would be $1.20 in that year and would rise to $5.20 in 2021, when staff training and computer upgrades were completed.
In CBO's assessment, taxpayers would gradually become aware of some of the changes in the IRS's enforcement techniques associated with the initiatives. In response, they would shift to other, less detectible forms of tax evasion. As a consequence, the ROI for the 2019 initiatives would fall from $5.20 to $4.20 by the end of the 10-year period, CBO estimates.
CBO expects that the IRS would tackle the areas of noncompliance with the highest ROI first (that is, it would begin with the least difficult cases to pursue). For that reason, CBO estimates that the ROIs on the 2020 initiatives would be lower than those on the 2019 initiatives, the ROIs on the 2021 initiatives would be lower than those on the 2020 initiatives, and so forth.
The largest source of uncertainty in the estimates relates to the limited data available for the computation of ROIs. The estimates are largely based on the IRS's past audits and collections. However, the IRS might use the additional appropriations to develop and implement new ways to audit taxpayers and to collect taxes owed. To the extent that those new initiatives diverged from the approaches used in the past, the revenues raised by the option would differ from the estimates reported above.
A second large source of uncertainty concerns which people would be subject to new enforcement activities, given that very different techniques are used to audit diverse categories of taxpayers. Because of the complexity of their returns, higher-income people and businesses are usually audited through face-to-face meetings with the IRS's auditors. Those audits also typically encompass most or all items required to be reported on tax returns. By contrast, most audits of lower- and moderate-income taxpayers focus on fewer issues and are conducted through correspondence. Thus, audits of higher-income people and businesses are more costly, on average, than audits of taxpayers with lower income. However, the amounts collected from audits of higher-income taxpayers are, on average, much larger than collections from audits of taxpayers with lower income.
A third source of uncertainty concerns the IRS's ability, at least initially, to implement new compliance initiatives. Outdated computer systems and a reduction in the number of experienced employees (as more employees become eligible for retirement in the next decade) would slow the implementation of new initiatives. If the hiring and training of staff and the updates to the IRS's computer systems for new initiatives took more than three years, the revenues raised by the option would be less than the estimates shown.
A fourth source of uncertainty is the extent to which taxpayers would respond to new enforcement initiatives by becoming more compliant with the tax code. The estimates do not reflect the very uncertain effects that enhanced enforcement might have on voluntary compliance.
The principal argument for the option is that increasing the IRS's resources would not only reduce the deficit, on net, but would also improve tax compliance without raising tax rates, broadening the tax base, or imposing new taxes. If the option was implemented, many taxpayers who are not compliant under the current tax system would pay the taxes they owe.
The main argument against the option is that increasing the number of audits would impose burdens on some compliant taxpayers, even though the audits would target noncompliant taxpayers. The criteria used to select taxpayers for audits are not perfect, and some compliant taxpayers would be audited. Although they had been compliant, they would potentially bear the costs of audits—for example, through payments to accountants and lawyers, earnings lost because of appointments with auditors, the monetary and nonmonetary costs associated with compiling documentation, and the anxiety caused by interactions with the IRS. Lower-income taxpayers, in particular, may not have sufficient resources to dispute assessments by the IRS. Some compliant taxpayers might pay the IRS's assessments simply because they viewed the costs of disputing those assessments as greater than the amount of taxes the IRS claimed was owed.
Although the option would boost tax collections, increasing funding for audits and collections—even by much more than the option specifies—would not be sufficient to substantially reduce noncompliance. Combining an increase in funding with legislation that expanded enforcement mechanisms (such as enabling the IRS to obtain more information that could be used to verify taxpayers' claims or imposing higher penalties) would probably be a more effective approach to significantly increase compliance and reduce the budget deficit. Simplifying or substantially changing the tax code would, to some extent, further improve compliance, although some approaches that would reduce noncompliance (for example, eliminating complicated rules that would limit the amount of a deduction) would also increase the deficit.