Automatic Cuts To The IRS Will Increase The Deficit

While sequestration was meant to be a last resort, it was originally created to force lawmakers to take action to reduce the deficit. Yet now that it’s gone into effect there are some parts that will likely do the opposite. The Internal Revenue Service (IRS) will take a hit just like all other agencies, and cuts to its budget could hamper its ability to collect tax revenues, pulling in less money to fund the federal government.

In April, the agency announced it would furlough more than 89,000 employees to cope with sequestration cuts. Operating at normal capacity, the agency collected $2.5 trillion in government revenues last year, $50 billion from enforcement activities. But reducing operations will bring in less money. Every dollar invested in its enforcement, modernization, and management system reduces the deficit by $200, and every dollar it spends on audits, liens, and seizing property from tax evasion nets $10. One estimate calculated that furloughing just 1,800 enforcement positions could mean losing $4.5 billion in revenue.

On top of regular collection activities, sequestration cuts could take some teeth out of the IRS’s efforts to crack down on tax evasion in offshore havens. As Zach Carter reports, “Since 2009, the IRS has recovered roughly $5.5 billion in unpaid taxes and penalties through amnesty programs targeting Swiss banking customers.” These programs have allowed the IRS to collect important data on which banks help people illegally hide their money as well as the accountants and advisers who help move the money over, which it could use to open new investigations. But budget troubles have kept it from taking advantage of this information. Its funding has been decreased in recent years, allowing it to only audit about 1 percent of tax returns. Sequestration will mean even fewer resources to after evasion.

The idea that spending cuts will get our economy going is misguided, given that government spending has fallen and austerity is acting as a drag on the recovery. As the case of the IRS shows, some spending cuts may end up leading to an even bigger loss in funds.