The Tax Code Has the IRS Understaffed, Not a Tight Budget
By April 15th, all American taxpayers should have filed their taxes with the Internal Revenue Service. This year, two issues gained prominence in the filing process.
First, this year's tax returns included a new section addressing the individual health care mandate created in the Patient Protection and Affordable Care Act.
Second, between budget cuts and internal issues, the IRS claims it is woefully understaffed and underfunded, making it difficult for the agency to complete its statutory duties with respect to revenue collection.
In reality, both problems are the result of an overly burdensome tax code that makes compliance difficult, with excessively high administrative costs. The most effective solution requires a fundamental rethinking of tax policy, with an eye toward revamping today's tax code and making it simpler, fairer,and flatter.
Currently, the IRS budget is $10.9 billion, a $346 million reduction over last year's budget, and it's the fifth year of cuts, which have seen the agency's budget shrink by $1 billion. As a result, IRS Commissioner John Koskinen has warned of a less efficient and slower tax season this year, with the potential for delays, especially on paper returns. The average four weeks wait for a refund may jump to seven weeks, given budget cuts and staff shortages.
Others echo the IRS commissioner's concerns over deteriorating service. According to the National Taxpayer Advocate, in 2015, the IRS will not answer 50 percent of the calls it receives, and of those who do get through, the average wait time will be 30 minutes - and much longer during peak hours. The situation is even more dire for late filers, some 15 million taxpayers, because after tax season, the IRS will not be answering any tax law questions, leaving puzzled taxpayers to resolve their concerns on their own.
As the IRS frets over shortfalls that make administering the tax code difficult, filing taxes is no less a burden on the roughly 150 million individuals required to file. American taxpayers spend 6 billion hours preparing their taxes for the IRS, with direct compliance costs estimated to be $168 billion. Others suggest a much higher number. Once indirect and economic costs of tax compliance are included, the overall burden on the economy soars to $215 billion to $987 billion.
For many taxpayers, this year's tax season included a new wrinkle, as the IRS begins to enforce the individual mandate included in the Patient Protection and Affordable Care Act. Taxpayers are now required to report whether they have the acceptable minimum level of health care coverage. If not, they can be penalized by the IRS. If eligible for health care tax credits, taxpayers also must report any premium tax credits for health insurance they have received. And if taxpayers are not exempt from the mandate and have not purchased health insurance, then they must submit a "shared responsibility payment" to the IRS. While this new mandate is perhaps the most visible and onerous change in the tax code, it's just one of the many burdens imposed on taxpayers by an overly complex system of taxation.
With a tax code that runs 4 million words and has been changed over 4,680 times since 2001, it's not surprising that taxpayers and even the agency enforcing the code struggle to keep pace. While it may be difficult to assess whether the IRS allocates its resources most efficiently and most cost-effectively administers the tax code (something that the Treasury Inspector General for Tax Administration is investigating), there's an alternative that would enhance the agency's efficiency instantly: Congress can pass fundamental tax reform to create a simpler, fairer tax code, eliminating complexity and reducing the workload at the IRS.
A tax code that tries to be all things to all people inevitably will be complex and increase both compliance and administrative costs. As lawyers and lobbyists contort the tax code to favor specific industries or social policies, the code grows in size, with the IRS generating more forms, decisions and letters with respect to enforcement.
This ad hoc approach to tax law moves the tax code further from what most economists view as the basics of any tax code: simplicity, equity and efficiency. As far back as 1776, Adam Smith outlined the requirements of an effective tax code: "Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state."
The current complexity and mounting administrative costs suggest fundamental tax reform is long overdue. Congress should be willing to reconsider its approach to tax policy and stop tinkering within the current broken system and look to broader reforms to simplify the tax code.
