Don’t Cry for the IRS, We’re Doing Their Work for Them

January 16, 2015

The Internal Revenue Service has announced that they are overworked and underfunded so they are taking the “Service” out of the IRS.

In her recent report to Congress, National Taxpayer Advocate Nina E. Olson warns that “taxpayers this year are likely to receive the worst levels of taxpayer service since at least 2001 when the IRS implemented its current performance measures.”

The report points to a “combination of the IRS’s increasing workload, the erosion of public trust occasioned by the IRS’s use of “tea party” and similar terms in screening applicants for tax-exempt status, and the sharp reduction in funding have created a “perfect storm” of trouble for tax administration and therefore for taxpayers.”

One the one hand, it is easy to sympathize with the IRS’s complaints of being overworked. As I’ve testified to Congress many times, thanks to the relentless growth of credits and deductions over the past 20 years, the IRS has become a super-agency, engaged in policies as unrelated as delivering health care and welfare benefits to subsidizing the manufacture of energy efficient refrigerators. If we were starting from scratch, these would not be the functions we would want a tax collection agency to perform. So tax reform, not a bigger budget, is the key to easing the IRS’s workload.

On the other hand, we shouldn’t cry for “overworked” tax collectors because we taxpayers are doing more and more of their work for them. When it comes to paying taxes, Americans are some of the most compliant in the world. According to the IRS’s latest estimates (for 2006), the voluntary compliance rate is 83 percent. Which means that the Service is collecting the vast majority of the money it expects us to pay on-time and with a minimal amount of avoidance. European tax collectors would die to have such a compliant tax base.

And complaints about the thousands of jobs lost at the IRS over the past decade ring as hollow as the loss of operators at the phone company. Electronic filing has reduced the need for armies of people to manually keypunch our paper tax returns into the IRS system and no doubt reduced the error rate dramatically.

As the nearby chart shows, in 2000, only about one-quarter of all individual tax returns were filed electronically—the vast majority of which were filed by paid tax preparers. By 2013, share of returns filed electronically had jumped to 83 percent. Remarkably, 53 percent of all returns today are prepared by practitioners, while 30 percent of taxpayers are preparing their own returns with the use of commercial software such as TurboTax or TaxCut.

To be sure, these tools don’t eliminate the possibility of errors or abuse any more than digital phones eliminate misdialed phone calls, but they have largely replaced so many of the functions that used to be the day-to-day functions of the IRS. Who needs to call the IRS when these software packages mindlessly walk you through the tax return as easy as booking a flight and hotel for your next vacation—and back it up with 24/7 helpdesks?

The solution to the IRS’s problems is tax reform of course, not a bigger budget. Properly done tax reform should reduce the IRS to its core function of collecting tax revenues, not coaxing me to replace my windows or drive an electric car. And the economy might be better off too if all those people who we are paying to fill out our tax returns could turn their talents to more productive endeavors.


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