Before You Cheer IRS Budget Cuts, Consider This

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IRSCongress is cutting the budget of the Internal Revenue Service. Granted, the IRS is not the most beloved agency in our government, and complying with the rules it enforces isn't exactly a favorite national pastime. But before you cheer the move, consider this: While most parts of the government operate by consuming money, the sole mission of the IRS is to generate the funds that keep the country running.

Cutting its budget is like killing the goose that lays golden eggs -- or at least putting her in a smaller pen and feeding her less.

The Cost of Noncompliance

According to its most recent estimates, the IRS reports that the individuals and businesses who don't pay what they owe rob the government (and the rest of us taxpayers, as well) of a whopping $385 billion per year. That's as of 2006, and the numbers have been rising over time.

While our nation has been debating raising taxes on this group or that group in order to generate much-needed revenue, there are taxes already due going uncollected. The IRS estimates the voluntary compliance rate at 84%, meaning that 16% of taxes have to be chased down.

The money to improve our nation's infrastructure and schools, to help create jobs, and to aid cash-strapped state governments needs to come from somewhere. Tracking down those uncollected taxes seems like a good place to start.

Cutting the IRS budget means cutting the number of people hunting down these much-needed dollars. Taxpayer advocate Nina Olson, who operates independently within the IRS, representing our interests, has singled out this budget cut as a huge problem for all taxpayers. She notes, for example, that fraud is more widespread than ever, and the IRS will have fewer resources with which to address it. She estimated that more than a million tax returns in 2011 might have been fraudulent, up 72% from 2010 levels.

Are Pink Slips Deserved?

It would be one thing if the IRS was ineffective at its job. But that does not appear to be the case. Consider these startling numbers David Cay Johnston reported in a column for Reuters:

IRS data show that auditors assigned to the 14,000 or so largest corporations found $9,354 of additional tax owed for every hour spent testing tax returns in the 2009 fiscal year. The highest-paid IRS auditors make $71 an hour. Based on a 2,080-hour work year, that works out to around $19 million of lost revenue annually for every senior corporate auditor position cut from the payroll.

Got that? People paid $71 or less per hour generated $9,354 per hour. They produce more than 100 times their salary. Seems like the smart thing to do would be to hire more such people.

Putting the Costs in Context

Here's another way to look at these cuts: The proposed IRS budget, per Johnston, is less than $12 billion for a year. In other words, it's not a huge resource-consumer in our national budget.

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According to ThirdWay.org, drawing on data from the U.S. budget, for every $1,000 you forked over in 2010 federal taxes, $4.06 went to the IRS. Compare that with $4.32 for diplomacy and embassies, $22.53 for transportation, $31.33 for veterans' affairs, and $201.71 for defense.

With our nation dealing with a huge deficit, Congress is taking a service that doesn't require a lot of money to run -- and has the potential to generate many hundreds of billions of dollars more -- and shrinking its budget.

Take Action

If this tax cut seems stupid to you, too, consider letting your senators and representative in Washington know that. It's never been easier to contact your elected representatives.

Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio.

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