How budget cuts can increase the deficit

The Internal Revenue Service got hit with a 2.5 percent budget cut for 2012, paring back money for tax enforcement even as tax compliance has gotten worse. The agency got $300 million less than in the previous year — including $193 million less for tax enforcement.
(AP)

The IRS estimates that every additional dollar spent on enforcement brings in about $4 to $5 dollars of additional revenue, which would mean that the 2012 budget could lose taxpayers anywhere from $772 million to $965 million — more than twice what it originally saved through the cuts to enforcement. As a result, the recent IRS budget cuts would actually be contributing to the deficit, according to Nina Olson, who runs an independent watchdog for taxpayer advocacy within the IRS. According to Olson’s latest report to Congress, the budget cuts combined with the IRS’ growing workload have become “the most serious problem facing U.S. taxpayers.” The report explains:

The IRS does not have enough resources to handle its current workload. The lack of adequate funding for the IRS causes multiple problems. Taxpayers calling the IRS with tax-law questions often cannot get through, creating considerable frustration and potentially reducing compliance. Compliant taxpayers whose refunds are held up or who are audited do not receive timely responses to their phone calls and correspondence. The IRS lacks the resources to maximize revenue collection, thereby exacerbating the federal budget deficit.

The report points out that the number of questionable tax returns skyrocketed in 2011, as the growth in electronic filing has made fraud prevalent.