IRS misses out on $34bn in US corporate taxes

The US government has missed out on $34bn (£28bn) of tax revenues from large companies because of budget cuts at the Internal Revenue Service (IRS), according to academic researchers who warn the losses could rise steeply

A study by a team at the Indiana University Kelley School of Business looked at confidential IRS audit data from tax return years 2000 to 2010 of large, publicly traded corporations.

It estimates that the IRS could have increased collections from just this subsample of firms by $34.3bn if provided with an additional $13.7bn in overall resources.

The $34.3bn estimate accounts for approximately 19.3% of the estimated corporate tax gap from 2002 to 2014.

The researchers suggest tax revenue is being lost not just because the IRS is auditing fewer returns but because it has fewer resources to identify potential errors and to follow up on returns with taxpayers.

Casey Schwab, an associate professor of accounting at Kelley, said: ‘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.

‘The scope of the audits is substantially reduced. 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.’

Adjusted for inflation, the IRS budget of $11.3bn in 2019 is smaller than in 2000 and 19% below its highest level of funding in 2010, according to the Government Accountability Office. It now has 21% fewer employees than it did eight years ago. The number of examiners has declined by 38% since 2010.

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 modernisation. However, relatively little funding has been designated for increasing IRS tax audits.

The researchers said their study should be of interest to Congress when it decides on the amount of resources to allocate to the IRS. They point out that any resource constraints the IRS currently faces will be magnified by the increased responsibilities it has as a result of tax reform, and argue that cutting budgets is one way to handicap an agency without eliminating it altogether.

Schwab said: ‘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. 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.’

How do IRS resources affect the corporate audit process

Pat Sweet

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