Filed under: Taxes, U.S. Government, Income Tax, Tax Laws
Paying taxes is getting much harder. In addition to collecting revenue, the Internal Revenue Service helps Americans to navigate our complicated tax code. Up until recent years, the agency ran a robust customer service program, which combined telephone operators, walk-in centers and filing assistance. Increasingly draconian budget cuts over the past five years, however, have starved the IRS of resources and begun dismantling this support system. For taxpayers this means much less help when they need it, even at the same time as Obamacare requirements are adding a layer of complexity to tax filings.
According to Patrick Sheehan, an Illinois tax attorney and former IRS agent, this is going to be a big problem. And it's not going to be a problem for government, corporate taxpayers or the wealthy. This is a problem that will hit home for average taxpayers just trying to do their best.
"We all dislike the IRS to some degree," Sheehan said. "Some people more than others of course, but honestly the IRS is a necessary evil in today's voluntary tax compliance system. You can look at the IRS like a policeman. The policeman makes sure that everyone pays their liabilities and obeys the law, and drops the hammer on them when they break it."
Congress Cut Its Budget
When you leave the agency without enough money to do its job, he explained, "you handcuff the policeman." That's exactly what's happened as Congress has slashed the IRS's budget again and again over the past several years, totaling $1.2 billion in cuts since 2010.
The motives, Sheehan said, are largely political. Republicans in Congress are trying "punish" the IRS for recent scandals such as allegations that it targeted Tea Party groups seeking tax-exempt status. Others have theorized that opponents of Obamacare are trying to starve the agency into dismantling the law's enforcement mechanism.
Regardless of motives, the result has been a 30 percent reduction in staff, fewer audits and dramatically cut public services. Today the IRS refuses to answer any but the most basic questions on tax law. The agency has also discontinued all help for off-season requests leaving, for example, anyone who has to file quarterly estimated taxes (a relatively complicated process) on his own.
Hundred of thousands of people call the agency looking for help during tax season, according to Sheehan, and many of them are going to go underserved. "Right now, the taxpayer advocate is estimating that only half of those calls will be answered," he said.
How You Will Pay
The upshot is that all of the money that Congress saved by gutting the IRS will come back out of taxpayers' pockets. Citizens left to their own devices will have to either hire professional help or run the risk of getting their taxes wrong. Accountants can cost hundreds of dollars to hire, but making a mistake with your income tax triggers interest, fees and penalties that can add up even faster. Mistakes will compound under this system, since hiring an accountant is generally more expensive than the refund is worth. Some people will get caught and penalized. Many won't.
What about arguing that you reached out for help but couldn't get any? Turns out that's just not something the government is interested in. "Ultimately it falls up on the taxpayer to file an accurate tax return," Sheehan said. "If the taxpayer doesn't file an accurate return then certainly the taxes and the interest on the taxes is going to be their responsibility.
An IRS agent or judge might be willing to waive penalties in the face of a good faith error, but even that's not guaranteed. And if a letter goes unopened because the understaffed IRS office simply couldn't get to it in time? Once again, this becomes the taxpayer's problem. Fees, interest and penalties will all collect while that envelope sits on a shelf.
In the face of all of this, sooner or later some people will inevitably give up. Demanding that citizens keep up with increasingly byzantine tax laws while offering no support whatsoever will seem unreasonable. An overwhelmed agency won't be able to track everyone who has and hasn't paid, and tax evaders will increasingly begin to slip through the cracks.
Opting Out of the System
Law-abiding citizens will look sideways at their neighbor who no longer pays taxes and feel like fools for doing so themselves. It's a domino effect that Sheehan describes as the worst-case scenario, and one that's not necessarily all that far away. "Collapsed is a really good word," he said, "because if you can't get work done with the IRS, what's going to happen is people are going to stop filing their tax returns."
Without the "police officer" to monitor our voluntary compliance system, America could approach this breaking point where more and more people start opting out of the system. Even law-abiding citizens will eventually stop paying if they feel like chumps, and it only needs to start with a few frustrated taxpayers throwing up their hands after the second hour on hold for a simple question about the 1040.
"I think it's going to be significant numbers," Sheehan said. "What drives people to file old tax returns is a letter from the IRS. That's what drives people, because they have an innate fear of the IRS. If those letters stop coming because the IRS is simply understaffed and overwhelmed, that guy's not going to file."
"The IRS is doing the best that it can right now under really terrible circumstances, but at some point there's going to be so much momentum behind the people that stop filing their returns or people who stop paying their taxes, at some point there's going to be so much momentum that it will be hard to undo," Sheehan said.