A series of budget cuts at the Internal Revenue Service has led to an estimated $34.3 billion in lost tax revenue from large companies, according to a new study.
New research from the Indiana University Kelley School of Business backs up previous statistics indicating that the IRS is auditing fewer tax returns from corporations because it has fewer people and resources available to identify potential errors and follow up on questionable tax returns. However, the researchers say this is the first study to actually quantify the amount of corporate tax revenue lost during the audit process per dollar of IRS budget cuts.
“We’re quantifying the effect of budget cuts on collections by trying to better understand how cuts impact the entire enforcement process — from audit rates to ultimate settlements between taxpayers and tax authorities,” stated Casey Schwab, an associate professor of accounting at Kelley.
The research study, “How do IRS resources affect the corporate audit process?” is slated to be published by The Accounting Review, a journal from the American Accounting Association. It uses IRS audit data from 2000 through 2010 of large, public corporations. The professors estimate the IRS could have collected an extra $34.3 billion from just this subsample of companies with relatively little in extra overall resources from Congress. The $34.3 billion estimate accounts for approximately 19.3 percent of the estimated corporate tax gap from 2002 through 2014.
In recent years, especially since the passage of the Tax Cuts and Jobs Act at the end of 2017, Congress has appropriated more funding for the IRS to implement the new tax law, as well as deal with issues such as taxpayer identity theft, taxpayer service and computer modernization. However, relatively little funding has been designated for increasing IRS tax audits, even though audits and examinations more than pay for themselves.
“The scope of the audits is substantially reduced,” Schwab said in a statement. “The IRS has fewer resources to actually dig into the details. While the IRS appears to still target the most aggressive positions, they can’t audit as many positions within the return. They just don’t have the resources.”
When adjusted for inflation, the 2019 IRS budget of $11.3 billion is less than in 2000 and 19 percent beneath its highest level of funding in 2010, according to the Government Accountability Office. The agency now has 21 percent fewer employees than it did eight years ago. Meanwhile, the number of examiners has declined by 38 percent since 2010.
“Given the continued cuts to the IRS budget, the amount of lost tax revenue from public companies could be even higher than what we estimate,” stated Bridget Stomberg, also an associate professor of accounting at Kelley. She jointly conducted the study with Schwab, along with Michelle Nessa, an assistant professor at Michigan State University, and Erin Towery, an associate professor at the University of Georgia and an academic research consultant to the IRS.
The researchers believe their study should be of interest to lawmakers when Congress weighs the amount of funding to appropriate to the IRS, particularly as the IRS faces further resource constraints as a result of the new responsibilities of implementing not only the Tax Cuts and Jobs Act, but also the more recent Taxpayer First Act, which promises to reform many of the practices of the IRS, including the appeals process.
“By eliminating the role of the IRS, you’re effectively reducing corporate tax burdens. On the one hand, this could be used to spur economic growth,” Schwab stated. “On the other hand, there’s a notion that everyone should pay their fair share. The IRS is fundamental in preventing businesses from engaging in transactions that aggressively reduce their tax liability.”