IRS Funding Cut Could Cost Government Billions in Revenue, Study Finds

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A new study conducted by researchers at the Treasury Department, Harvard University, and The University of Sydney warns that this move could be costly.

IRS Funding Cut
IRS Funding Cut ( Photo: The Washington Post )

Republicans succeeded in rescinding $21.4 billion in additional funding provided for the IRS as part of the Inflation Reduction Act

The study, which analyzed Internal Revenue Service (IRS) data from approximately 710,000 in-person audits, reveals that audits generate substantial returns for the government. While audit costs increase for individuals with higher incomes due to the complexity of their tax filings, the returns increase even more. For every dollar spent on auditing taxpayers in the top 10% of earners, the government receives over $12 in revenue.

The Washington Post columnist Catherine Rampell emphasizes the significance of this data, stating that, on average, direct revenue collected from audits exceeds costs by a factor of 2 to 1. However, the study highlights that this payoff varies based on income. Auditing the bottom half of taxpayers only results in a rough break-even for the IRS. In contrast, auditing the top 1% brings in $3.18 for each dollar spent, and for the top 0.1%, it generates $6.29.

The study reveals a lasting benefit from audits

Taxpayers who were audited voluntarily pay more taxes in subsequent years for at least 14 years after the initial audit. Harvard economist Nathaniel Hendren, one of the paper’s authors, tweeted that for every dollar an audited person pays during their audit, they pay an additional $3 in taxes in the following years.

While the Congressional Budget Office (CBO) predicts only modest lasting effects from increased enforcement, the new study demonstrates that longer-term deterrence results in approximately three times the revenue of the initial audit. Taxpayers either become more compliant or correct unintentional errors, leading to higher tax payments over time.

Columnist Catherine Rampell suggests that if the IRS allocates more resources to audits, particularly targeting high earners, the potential payoff could be enormous, surpassing previous assumptions. The research also indicates that auditing top earners is a more effective way to increase revenue than raising tax rates. Rampell suggests that instead of raising taxes on the wealthy, enforcing existing laws may be a more viable option. However, if the $20 billion cut to IRS funding affects enforcement and audits, lawmakers may have inadvertently sacrificed hundreds of billions in potential revenue.

 

READ ALSO: Update On The Stimulus: Tomorrow, Californians Can Begin Applying For Monthly Direct Payments Of $1,000

 

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