IRS Budget Cuts Could Result in Businesses Engaging
in More Aggressive and Questionable Tax Mitigation Strategies
A series of budget cuts at the Internal Revenue Service has led to relatively little funding being designated for increasing IRS tax audits, even though audits and examinations more than pay for themselves. The IRS is auditing fewer tax returns from corporations because it has fewer people and resources available to identify potential errors and follow up on questionable tax returns. Instead, especially since the passage of the Tax Cuts and Jobs Act at the end of 2017, Congress has appropriated more funding for the IRS to implement the new tax law, as well as deal with issues such as taxpayer identity theft, taxpayer service and computer modernization.
When adjusted for inflation, the 2019 IRS budget of $11.3 billion is less than in 2000 and 19 percent beneath its highest level of funding in 2010, according to the Government Accountability Office. The agency now has 21 percent fewer employees than it did eight years ago. Meanwhile, the number of examiners has declined by 38 percent since 2010.
We anticipate that the above conditions will only get worse as the IRS faces further resource constraints as a result of the new responsibilities of implementing not only the Tax Cuts and Jobs Act, but also the more recent Taxpayer First Act, which promises to reform many of the practices of the IRS, including the appeals process.
Because the IRS is fundamental in preventing businesses from engaging in transactions that significantly reduce their tax liability the above new could result in businesses engaging in more aggressive and questionable tax mitigation strategies than in the past and also result in an increase in businesses engaging in fraudulent transactions as a way of substantially reducing their tax obligations.