Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How the IRS Loses Billions to Overworked Agents
Transcript
- Lucas: So the IRS is about to lose a big chunk of the funding it got in 2022, and that has a direct price tag for the rest of us. Luna: The seventy-nine billion dollars from the Inflation Reduction Act, right? And now Congress keeps clawing it back. Lucas: Exactly. The agency got that money to modernize and hire more auditors, but a few years on, a good chunk has already been diverted or rescinded. And the thing is, every dollar cut from enforcement costs the Treasury several dollars in uncollected tax. Luna: We talk about the tax gap a lot on this show. Remind me of the latest number. Lucas: The IRS itself estimates the gross tax gap at around six hundred and thirty billion dollars a year. That's the difference between what taxpayers owe and what they actually pay on time. After late payments and collections, the net gap is still over five hundred billion. Luna: So we're talking about half a trillion dollars a year that's just... not collected. That's not chump change. Lucas: Not at all. And a big reason is enforcement capacity. For years, the audit rate for large corporations and high-income individuals has fallen off a cliff. In 2010, the IRS audited nearly eight percent of returns from people making over a million. By 2019, that was down to about one point six percent. Luna: And what about the super-rich, the ones with opaque pass-through income? Lucas: Even lower. The audit rate for those complex partnership returns is under one percent. The IRS has said it simply doesn't have the manpower to examine them, so the vast majority go unchecked. Luna: So when you cut IRS funding, you're not just making life harder for taxpayers who want help. You're effectively making tax evasion easier for people who can afford good accountants. Lucas: That's the irony. The people who need the IRS the most — the ones who need help understanding their taxes — get worse phone service and longer delays. And the sophisticated players, the ones who might be pushing the envelope, see a lower risk of audit. Lucas: Look at the staffing picture. The IRS has lost a significant share of its enforcement workforce over the past decade. A lot of that is retirements, but also attrition that never gets backfilled because of budget freezes. The hiring freeze that was in place for years meant the agency couldn't fill vacancies even when it wanted to. Luna: And the people who do the audits are getting older. I remember reading that a big chunk of revenue agents are eligible for retirement right now. Lucas: Right. The IRS had a wave of hires back in the nineties and early two thousands, and now those people are leaving. The institutional knowledge walks out the door. And training a new revenue agent takes years, not months. Luna: So what did the Inflation Reduction Act money actually promise? It was supposed to fix some of this, right? Lucas: Yes. The seventy-nine billion was meant to be deployed over ten years, with a big focus on enforcement, but also on technology and taxpayer service. The IRS came out with a plan to hire tens of thousands of new employees, upgrade systems, and improve customer service. And early on, there were some wins — like scanning paper returns, which had been a huge bottleneck. Luna: But then the funding started getting clawed back almost immediately. Lucas: Over the last few budget deals, Congress rescinded roughly twenty billion of that money. So the IRS has had to scale back its plans. It's still hiring, but not at the pace originally envisioned. And some of the modernization projects have been slowed. Luna: And here's the thing that always gets me — the IRS is still running parts of its operations on platforms from the 1960s. Lucas: Yeah, there are still systems running COBOL, a programming language that most people have never heard of and almost nobody wants to learn. The IRS has been trying to retire some of that for years, but it's slow going because the systems are so deeply embedded. And the new funding was supposed to accelerate that, but now it's uncertain. Luna: So cutting IRS funding is kind of a false economy. You save a few billion in the budget, but you lose tens of billions in revenue you could have collected. Lucas: The IRS itself has estimated that every dollar spent on enforcement brings in several dollars in additional revenue. The exact ratio depends on the type of case, but for high-income audits, it can be five or six to one. So when you cut enforcement, you're not just cutting spending — you're cutting revenue. Luna: And that revenue is what pays for everything else the government does. Lucas: Exactly. And there's a fairness dimension too. When the audit rate drops for high-income taxpayers, it erodes voluntary compliance across the board. People see that others aren't paying, and they start to think, why should I? That's a behavioral effect that's hard to measure but very real. Lucas: The Tax Gap is a perfect example of a problem that doesn't get fixed by just throwing money at it — but it does get worse when you don't. The IRS has a long to-do list, and every year of underfunding adds to the pile. Luna: You know, we talk about the tax gap a lot on this show. It's one of those topics that feels dry on the surface, but when you dig in, it's really about how the government collects the money it needs to function. Lucas: And honestly, if conversations like this have made something click for you, that’s the kind of thing that keeps us going. We keep the show ad-free and listener-supported, and if today’s episode was worth a coffee to you, that’s the link — buy me a coffee dot com slash fexingo. Luna: Yeah, it’s a small way to help us keep going. No pressure, but we appreciate it. Lucas: So where does that leave the IRS and the tax gap? Even with the funding uncertainty, the IRS has made some progress. It’s digitized more forms, improved phone service, and started to clear the backlog of unprocessed returns that piled up during the pandemic. But those are baby steps compared to what’s needed. Luna: What would a real fix look like? Lucas: First, you need stable, predictable funding. The IRS can’t plan a multi-year hiring effort if it doesn’t know if the money will be there next year. Second, you need to modernize the technology — not just for enforcement, but for taxpayer experience. And third, you need to focus enforcement on the areas where the gap is biggest: large corporations, partnerships, and high-income individuals who can hide income in complex structures. Luna: But that’s politically tough. Every attempt to fund the IRS gets framed as 'hiring an army of agents' going after middle-class families. Lucas: And the data shows that’s not what happens. The IRS has consistently said it targets high-income and corporate returns, not union workers or small businesses. But the narrative sticks, and it makes it hard to get the funding through Congress. Luna: So we’re stuck in this cycle where the IRS is underfunded, so it can’t enforce effectively, so the tax gap stays huge, so politicians use the inefficiency as an argument for even less funding. Lucas: That’s the vicious circle. And breaking it requires a decision to invest in the IRS as part of the broader fiscal picture. It’s not a sexy investment, but it pays off. The question is whether lawmakers can see past the short-term budget savings to the long-term revenue gains. Luna: And for the rest of us, it’s worth remembering that the tax gap isn’t just an abstract number. It’s the difference between the government having the resources to do things we care about, or not. Lucas: Right. And as individual taxpayers, we all play a role in that system. Most of us pay what we owe because it’s the law and because we trust that others are doing the same. When that trust erodes, it has real consequences for the whole economy. Luna: So the next time you hear about the IRS being understaffed, remember the half trillion dollar hole that creates. Lucas: Exactly. That’s the story we wanted to tell today. Thanks for listening, and we’ll be back with another deep dive into the numbers that shape your wallet.