Occam's Razor

The Inflation Reduction Act, which was passed by the Senate on Sunday and should pass the House on Friday, has $80B in new funding for the Internal Revenue Service (IRS).

A lot of that money is going to modernize its woefully underfunded infrastructure, which is still stuck in the 1960s. If you need any convincing that, yes, it’s really that bad, the Washington Post has a must read story that documents how your return is actually processed, at least if you submit a paper return or mail in a check. Once you see it, you’ll wonder why it takes only months for them to process it.

For decades, the IRS has been woefully, systematically, and deliberately underfunded. In addition, it’s been given lots of new tasks, like responsibility for sending out stimulus checks. The root of the problem goes back to Ronald Reagan’s presidency. Reagan declared, essentially, that government is evil. He and most of his Republican successors have made a point of putting his words into action by continually making it harder for the IRS to function.

The result should have been a scandal, if our federal legislature actually cared about a functioning government. The IRS is nearly alone among government agencies in generating revenue. Its inability to have funding to do its job has probably cost the government trillions of dollars in uncollected tax revenues, bloating deficits and increasingly allowing almost anyone to get away with tax fraud.

The chances that your tax return will get audited is .3%. So there’s a 1 in 333 chance that your return will be audited. But if your return is pretty standard with your income and deductions within an ordinary range, your chances are virtually nonexistent. I’ve been paying income taxes for probably forty five years and it’s never happened to me. The closest I came was when I incorrectly missed reporting some capital gains, and the IRS computers spotted it. I paid the tax and a small penalty.

Every year there are fewer tax specialists available to audit tax returns. That’s because they are largely retired. With flat or reduced funding, hiring freezes and inadequate pay, tax auditors are hard to replace. This new act means to address this issue. But it won’t happen overnight.

I am hoping that Americans start to fear the IRS again. If they fear the IRS today, it’s largely a needless fear. Unless your tax return is highly unusual, it’s unlikely to get audited. As long as your income, interest, dividends and capital gains are close to what your employer, banks and brokerages report to the IRS, you have virtually no fear of an audit. If audited, you are probably about as likely as to discover you overpaid your taxes as underpaid them.

It will take years to train a new set of IRS auditors. Hopefully there will be enough old timers still left to train the new bunch correctly. They should be unleashed as soon as they are able. There are lots of tax scofflaws out there, and most of the unpaid taxes are likely owed by businesses using dubious accounting techniques.

It’s harder for us ordinary people to cheat simply because so much of our income is reported automatically. It’s easier if you are paid by cash, but with electronic payments this is getting harder to do. The IRS may be aware that you are cheating on your taxes, but with its insufficient resources it simply chooses to ignore all but the most glaring examples.

The difference between government revenue and expenses is borrowed, so tax scofflaws simply add to our collective debt, and without paying penalties in most cases. Finally, all these decades later, by the slimmest of Democratic majorities, money is being allocated to fully modernize and staff the IRS. A true American taxpayer should be relieved that it will become harder to cheat on our taxes.

Reagan’s idea that government is evil seems to be finally giving way a bit. The United States Postal Service (USPS) is required by law to deliver mail to anyplace in the United States. If it were a true corporation, it could pick and choose who can receive mail based on how profitable doing it would be. For decades, Congress has told the U.S. Postal Service to act like a private corporation. It required the USPS to prepay for all its employees pension benefits. This and declining letter volume quickly caused it to go into a financial tailspin. Congress repeatedly told the USPS to be an entity it couldn’t be and placed constraints on it to force it to be a service while wanting it to act as a corporation.

Lately, even Republicans are agreeing that some government agencies are necessary. In February, the U.S. Postal Service was at least partially bailed out. The bill passed with a majority of Republicans voting for it. It took decades of degraded service and mini bailouts as revenues before Congress finally did the obvious thing: let the USPS be a service again.

It did something similar last year with Amtrak, providing $44B for transportation, allowing Amtrak to modernize. But you can’t expect the USPS to act like a corporation when it’s really a service. The same is true with Amtrak, which will never have competition for passenger rail service nationwide. The attempt to make the USPS act like a corporation was a needless decades-long fiasco. As services, the government must step up to provide the funding needed to ensure it stays a service, because we all need the USPS, even if it seems sometimes that we don’t.

We’ll need to see a lot more legislation before government is allowed to function with some semblance of normalcy. But with special funding for the IRS, USPS and Amtrak, it suggests Reagan’s foolish notion that the government is evil may be finally dying.