Politics The Golden Age of Rich People Not Paying Their Taxes An eight-year campaign to slash the IRS’s budget has left the agency understaffed, hamstrung, and operating with archaic equipment. The result: a hundred-billion-dollar heist. Paul KielJesse EisingerProPublica Dec 11, 2018 schab / Shutterstock / IRS / Katie Martin / The Atlantic In the summer of 2008, William Pfeil made a startling discovery: Hundreds of foreign companies that operated in the U.S. weren’t paying U.S. taxes, and his employer, the Internal Revenue Service, had no idea. Under U.S. law, companies that do business in the Gulf of Mexico owe the American government a piece of what they make drilling for oil there or helping those that do. But the vast majority of the foreign companies weren’t paying anything, and taxpaying American companies were upset, arguing that it unfairly allowed the foreign rivals to underbid for contracts. Give the gift that lasts all year. Share The Atlantic’s journalism through 2019. Save 81% on gift subscriptions. Give Today Pfeil and the IRS started pursuing the non-U.S. entities. Ultimately, he figures he brought in more than $50 million in previously unpaid taxes over the course of about five years. It was an example of how the tax-collecting agency is supposed to work. But then Congress began regularly reducing the IRS budget. After 43 years with the agency, Pfeil—who had hoped to reach his 50th anniversary—was angry about the “steady decrease in budget and resources” the agency had seen. He retired in 2013 at 68. After Pfeil left, he heard that his program was being shut down. “I don’t blame the IRS,” says Pfeil. “I blame the Congress for not giving us the budget to do the job.” Republicans Exact Their Revenge Through a Tax Bill David Frum What's in—and Out of—the Final Republican Tax Bill Russell Berman The Deaths That Come When an Industry's Left to Regulate Itself Jesse Eisinger ProPublica Caught in the Bankruptcy Feedback Loop Paul Kiel ProPublica Had the billions in budget reductions occurred all at once, with tens of thousands of auditors, collectors, and customer-service representatives streaming out of government buildings in a single day, the collapse of the IRS might have gotten more attention. But there have been no mass layoffs or dramatic announcements. Instead, it’s taken eight years to bring the agency that funds the government this low. Over time, the IRS has slowly transformed, one employee departure at a time. The result is a bureaucracy on life support and tens of billions in lost government revenue. ProPublica estimates a toll of at least $18 billion every year, but the true cost could easily run tens of billions of dollars higher. The cuts are depleting the staff members who help ensure that taxpayers pay what they owe. As of last year, the IRS had 9,510 auditors. That’s down a third from 2010. The last time the IRS had fewer than 10,000 revenue agents was 1953, when the economy was a seventh of its current size. And the IRS is still shrinking. Almost a third of its remaining employees will be eligible to retire in the next year, and with morale plummeting, many of them will. The IRS conducted 675,000 fewer audits in 2017 than it did in 2010, a drop in the audit rate of 42 percent. But even those stark numbers don’t tell the whole story, say current and former IRS employees: Auditors are stretched thin, and they’re often forced to limit their investigations and move on to the next audit as quickly as they can. Without enough staff, the IRS has slashed even basic functions. It has drastically pulled back from pursuing people who don’t bother filing their tax returns. New investigations of “nonfilers,” as they’re called, dropped from 2.4 million in 2011 to 362,000 last year. According to the inspector general for the IRS, the reduction results in at least $3 billion in lost revenue each year. Meanwhile, collections from people who do file but don’t pay have plummeted. Tax obligations expire after 10 years if the IRS doesn’t pursue them. Such expirations were relatively infrequent before the budget cuts began. In 2010, $482 million in tax debts lapsed. By 2017, according to internal IRS collection reports, that figure had risen to $8.3 billion, 17 times as much as in 2010. The IRS’s ability to investigate criminals has atrophied as well. Corporations and the wealthy are the biggest beneficiaries of the IRS’s decay. Most Americans’ interaction with the IRS is largely automated. But it takes specialized, well-trained personnel to audit a business or a billionaire or to unravel a tax scheme—and those employees are leaving in droves and taking their expertise with them. For the country’s largest corporations, the danger of being hit with a billion-dollar tax bill has greatly diminished. For the rich, who research shows evade taxes the most, the IRS has become less and less of a force to be feared. The story has been different for poor taxpayers. The IRS oversees one of the government’s largest anti-poverty programs, the earned income-tax credit, which provides cash to the working poor. Under continued pressure from Republicans, the IRS has long made a priority of auditing people who receive that money, and as the IRS has shrunk, those audits have consumed even more resources, accounting for 36 percent of audits last year. The credit’s recipients—whose annual income is typically less than $20,000—are now examined at rates similar to those who make $500,000 to $1 million a year. Only people with incomes above $1 million are examined much more frequently. We submitted a detailed list of questions to the IRS and asked about the budget cuts’ effects on the agency’s enforcement efforts. The agency replied with a brief statement. “The IRS has substantial resources to identify and audit noncompliant taxpayers and continues to deter those attempting to evade their legal obligations,” it said. In ProPublica’s interviews with dozens of tax professionals and more than 50 former and current IRS employees—part of an ongoing series on the state of tax enforcement—many agency veterans wondered whether the damage of the past several years will ever be undone. And they had a greater worry: that the American public will inevitably realize how weak the IRS has become. The effects of an explosion in tax cheating would be dire. The nation’s already soaring budget deficit would surge by hundreds of billions of dollars more, pushing it well past $1 trillion. Commissioners of the IRS, starting with President George W. Bush’s appointee, Douglas Shulman, have warned Congress about a crisis like this since the budget cuts began, in 2011. But after eight years, Republican lawmakers, who are chiefly responsible for the reductions, show no signs that they think the danger is urgent. By the time the danger becomes indisputable, immense harm will already have been done. “In the last few years, it was really frustrating,” said Pam Reicks, a former manager at the IRS who, until she retired at the end of last year, oversaw a program to audit wealthy taxpayers with undeclared offshore bank accounts. “It’s like in the fall when you bob for apples,” she told us. “You’ve got a tub of apples and can’t use your hands to grab them. You can see all this abuse and fraud, and people not paying their taxes, but can’t use your hands to get it.” The IRS has never been a popular cause on Capitol Hill. But Democrats and Republicans long shared a grudging consensus that the agency’s basic work of tax collection deserved protection. That changed when the Republican Party came into power in 1994 and Newt Gingrich became the speaker of the House. The new majority’s main priority was tax cuts, and vilifying the IRS helped its case. Some conservatives favored a “fair tax,” a consumption tax based on purchases. Proponents said that this simplified approach to taxation would allow them to “abolish” the IRS. The notion wasn’t a fringe position within the party. Former Senator Richard Lugar of Indiana, a respected mainstream Republican, ran for president in 1996 on a platform of abolishing the IRS. A Republican congressman in 1998 introduced a bill to repeal the Internal Revenue Code by 2002. “Abolish the IRS” remains a potent talking point. Ted Cruz, the Republican senator from Texas, campaigned on the slogan when he ran for president in 2016. In 1997 and 1998, the Republican-controlled Senate held a series of dramatic hearings on alleged abuses by the IRS. Agency employees testified behind black curtains with their voices disguised, like Mafia snitches, to protect their identity. The testimony depicted an organization run amok, with claims of biased examiners and lurid tales of agents in flak jackets storming establishments. One restaurant owner told of a raid to seize business records at the home of an employee, during which agents forced a teenage boy to the floor at gunpoint and made a group of teenage girls at a slumber party get dressed “under the watchful eyes of male agents.” A USA Today headline read: “Witnesses Accuse IRS Investigators of ‘Gestapo-like’ Raids.” Congress followed the hearings with a sweeping overhaul of the agency, limiting the IRS’s collection powers and independence and giving taxpayers new protections. In the Senate, the reform bill passed 97–0 and President Bill Clinton signed it. It was only afterward that the Government Accountability Office debunked the allegations of IRS abuses. “Generally, we found no corroborating evidence that the criminal investigations described at the hearing were retaliatory against the specific taxpayer,” the report stated. “In addition, we could not independently substantiate that IRS employees had vendettas against these taxpayers.” By then it was too late. Reeling from the new law and the public attacks, IRS audits and collections tumbled to historic lows. Recovery took years, but because the IRS wasn’t a locus of partisan warfare during the presidency of George W. Bush, it did happen. By 2010, under the administration of Barack Obama, the IRS’s budget hit its high point: $14 billion in today’s dollars, about $2.5 billion above where it is today. Collections rebounded. But that spring, over unified Republican opposition, Democrats passed the Affordable Care Act. The sprawling health-care bill was also, indirectly, a sprawling tax bill, since it relied on the IRS to help administer many of its provisions. In the midterm elections that followed, Republicans took the House of Representatives in a wave similar to that of 1994. The first bill introduced by House Republicans in 2011 was a budget that slashed funding across the government and took special aim at the IRS. In addition to calling for a cut to its budget of $600 million, the bill prohibited the IRS from using any of its funding to carry out key parts of the Affordable Care Act. It didn’t pass. Since then, Republicans have cited the ACA as a reason to withhold funding from the IRS. In 2013, in response to an IRS request for a budget increase, former Representative Ander Crenshaw, a Florida Republican who then sat on the House Appropriations Committee, said, “Any kind of increase of this magnitude was going to be a challenge for some very basic reasons. There are a lot of objections to the Affordable Health Care Act, a lot of objections to Obamacare.” The agency faces a structural political problem. On one side are anti-tax Republicans, while on the other are Democrats who fear publicly supporting the taxman. “This is an agency that doesn’t have any friends,” says James Dyer, a Republican who worked for years on the House Appropriations Committee staff. “There’s no advocacy on the Hill for them except what they do for themselves.” In 2013, the IRS’s bulwarks collapsed. First, as part of a budget deal with Obama’s administration, Republicans got what they had previously sought: a $600 million cut, which came on top of cuts in the previous two years. Then things got even worse. In May, an IRS inspector general reported that the agency had targeted right-leaning nonprofits for scrutiny, igniting what came to be known as the Lois Lerner scandal, named for the manager who had overseen the effort. Shortly thereafter, another report criticized the IRS for loose spending on its conferences. Republicans seized on both scandals, calling hearings and launching investigations. To head an agency that was now devastated by budget cuts and scandal, Obama appointed John Koskinen. He was a turnaround specialist, a Mr. Fix-It who, at 74, emerged from retirement for one last job. Most recently, he’d led Freddie Mac after the mortgage giant was taken over by the government during the 2008 financial crisis. Fifteen years before, the Clinton White House tapped him to oversee preparations to avert the Y2K crisis. He was a Washington version of Winston Wolfe from Pulp Fiction, if Wolfe were unfailingly polite and liked working with large bureaucracies. A pragmatist, Koskinen is someone who, by his own description, almost never gets angry. To deal with the crisis, he embarked on a morale-boosting cross-country tour, starting in Cincinnati, the center of the nonprofit scandal. He toured two cities a week for three and a half months. Ultimately, he spoke with more than 22,000 IRS employees. They didn’t gripe, he told us; they were focused on getting the resources to do their job. “This was as good a workforce as I have ever worked with,” he said. Cutting the IRS’s budget didn’t make sense to him. It was one of the few areas of government that had a positive return on investment. Koskinen told the Senate, “I don’t know any organization in my 20 years of experience in the private sector that has said, ‘I think I’ll take my revenue operation and starve it for funds.’” When that argument failed, Koskinen tried to ease the vitriol through a personal connection. In 2014, he contacted Hal Rogers, who was then the Republican chairman of the House Appropriations Committee. Koskinen had grown up in Ashland, Kentucky, not far from Rogers’s district. He requested a meeting, couldn’t get in, and kept at it. After a few calls, he threatened Rogers’s staff that he would come and sit in their offices until Rogers met with him. They capitulated. When Koskinen and Rogers finally sat down together, sure enough, they knew folks in common. One of Koskinen’s good friends had gone to college with Rogers. The two had a friendly meeting. The next time Koskinen went to the Hill to testify, Rogers welcomed him warmly: “It is always good to see someone with strong Kentucky roots in the hearing room, particularly during basketball season.” He added, “I think much of you personally, Mr. Commissioner.” Then Rogers launched into a litany of criticisms: The IRS was trying to implement the Affordable Care Act against Congress’s wishes; it was spending too much, wasting too much, resisting reforms, and letting the poor commit too much fraud. By that time, the Republican narrative had taken hold: The IRS had to be “held accountable” for wasting millions on lavish conferences and persecuting conservative nonprofits for their political beliefs. These charges ignored inconvenient facts. The IRS’s conference spending had already plummeted, from $38 million in 2010 to $5 million in 2012—before the Republicans first criticized the agency for overspending. And inspector-general reports later pointed out that the IRS division that oversaw tax-exempt organizations had also targeted progressive groups, and concluded that the IRS had taken prompt action to address the previously identified problems in the nonprofit unit. Nevertheless, the scandals provided the rationale for ongoing budget cuts. The IRS lacked the “moral authority” to appeal for a budget increase, said Republican Representative Paul Ryan, then the chair of the House Budget Committee, in 2013. The cuts also forced discipline, Republicans argued. “We deliberately lowered the IRS funding to a level that would make the IRS think twice about what you are doing and why you are doing it,” Crenshaw told Koskinen in a hearing, “because you don’t have a single dime to spare on anything frivolous or foolhardy or even mediocre.” Neither Crenshaw nor any other current or former Republican member of Congress agreed to speak with ProPublica about the IRS. Some staffers talked on the condition of anonymity because they were not authorized to speak to the press on the record and acknowledged that the budget cuts were a mistake. Asked about the cuts, a Hill Republican staffer said, “It was punishment,” adding that the IRS clearly “needs more money and needs more people.” The lowest point for Koskinen—and for the IRS—came when, a few weeks before Christmas in 2014, after four years of consistent cuts, Congress slashed an additional $350 million from the agency’s budget. Because the cut came three months into the fiscal year, and only a few months before filing season began, it sent the agency scrambling. Desperate, Koskinen even considered briefly shutting down the IRS. Koskinen’s deputy said that this was the only time he saw his boss angry. “That night, I had trouble getting to sleep,” Koskinen told us. “Normally I go to sleep in about 22 seconds. It drives my wife crazy.” The sudden cut meant that the IRS couldn’t hire enough seasonal employees to answer taxpayer questions. As a result, almost two-thirds of the tens of millions of taxpayer calls would go unanswered that year. Koskinen was outspoken about the cause of the poor service. He liked to counter the constant urging to do “more with less” with a dose of realism. In fact, he said, the IRS would do “less with less”: answer fewer calls, and do fewer audits. That upset Republicans, who charged in a contentious 2015 hearing that IRS mismanagement, not the budget cuts, was causing the decline in service. Mike Kelly, a Republican representative from Pennsylvania, attacked Koskinen, the ever-optimistic turnaround specialist, for being too negative. “I would encourage you to be a little more upbeat,” Kelly told Koskinen. “It is spring! Let’s talk about the good side of it.” The congressman also didn’t like Koskinen’s frequent quip that the budget cuts were really a “tax cut for tax cheats.” “I don’t think that I would want to be a cheerleader, telling those people that don’t want to pay their taxes: ‘Hey, you know what? We are not going to be able to come after you,’” said Kelly, adding that “those comments are better kept internally.” Koskinen replied with a speech he’d given many times before and would give again. A collapse in tax compliance was really possible, he said. People will catch on. He worried about the U.S. becoming Italy or Greece. “What I don’t want to do is have somebody later on say, ‘You never warned us,’” he told Congress. “This is your warning.” It’s a decision that everyone who works at the IRS has to make: How will you respond when someone asks, “So what do you do?” Answer forthrightly, and you’re bound to be met with either iciness or open hostility. Over her 30-year career, Pam Reicks, the former IRS manager, adopted a solution that’s common for IRS lifers. “I work for the government,” she’d say. Not that she was the least bit embarrassed by what she did. She was proud to play a role in making sure that the tax system was fair and that the rich paid their share. The walls of her home office are covered with family pictures, awards from the IRS, and an American flag. Get her started on the topic of auditing, and her large eyes will grow wide as she excitedly tells you why it’s such tricky, interesting detective work.
How typical America. While the small Joe on the street will be audited to death and has to list and explain every single trade and investment so that taxman can extract the last penny legally possible, big corporations as well as the rich, domestic and foreign, are under much less scrutiny. Tax loopholes, moving earnings and revenues between different entities and the rest of the shabang. A country created by the rich for the rich. And the dumb commoners are only slowly waking up, after around 240 years. Yet most still believe its the country where dreams can come true (beyond the probabilities beyond dumb luck) and where every hard working will be ultimately rewarded.
You can bet that the IRS budget will go right back up again if the government ever starts having money troubles.
And for the time being it comfortably lives off debt you and your children and grand children have to burden. Don't forget that the entire military complex is feeding off your table as well.
you are rehashing old leftist rhetoric that defense spending is the cause of most of the fiscal problems in the US.
Well, this is a two-way street: my area happens to benefit a great deal from Federal spending. As for debt, most of it is owned by Americans, and I'll bet that those who own the debt are mostly the same ones who pay the taxes - and mostly the same ones who would pay more if taxes were higher.
Care to explain this ideology in detail? Where do you believe roads, bridges, public schools, equal opportunity, etc. come from?
Neither party has any interest in addressing the deficit as it won't win them votes in an election. It's hopeless. One can only face facts and prepare accordingly.