IRS Spared From Budget Cuts as U.S. Agency Seeks Revenue From Tax Cheats

The Internal Revenue Service avoided a $603 million budget cut proposed by House Republicans, preventing changes that could have cost the government $4 billion in uncollected revenue.

Under the proposed spending bill released today, the IRS budget for fiscal year 2011 would be $12.1 billion, or 0.2 percent less than in fiscal 2010. That level would subject the IRS to the same across-the-board funding cut as all domestic, non-defense agencies.

The legislation would deny the IRS a $486 million budget increase it had sought as it tries to improve enforcement of tax laws aimed at wealthy individuals and multinational corporations. House Republicans touted the denial of the IRS increase when they announced the budget agreement with the administration April 8.

The spending bill, which is expected to become law within the week, isn’t likely to lead to immediate changes at the IRS, said Kevin Brown, a principal at PricewaterhouseCoopers LLP in Washington who was acting IRS commissioner in 2007.

“They’ve been operating for the first six months as if this is all the money they’re going to have,” he said.

Tax Collections

The IRS didn’t respond to a request for comment today. Commissioner Douglas Shulman said last month that IRS budget cuts would be counterproductive, because they would reduce revenue from tax collections. He estimated that the loss caused by the $603 million proposed cut would be $4 billion.

The IRS budget has increased in each of the past 10 years, according to the agency. This year, Brown said, the IRS has more flexibility to absorb a flat budget because it doesn’t have to cover a pay raise for federal employees, who have had their salaries frozen.

In 2010, the IRS had a workforce of 94,711. That’s higher than in any year since 2004, though below the peak employment in 1992 of 116,673.

Senator Carl Levin, a Michigan Democrat who has called for the IRS to be more aggressive in pursuing offshore tax evasion, today said Congress should give the agency more resources.

“It’s going to hurt,” he said. “I think it’s a mistake. We ought to be increasing their enforcement budget instead of decreasing it.”

‘Big Fish’

Levin praised the agency’s recent focus on collections from wealthy taxpayers as an appropriate targeting of the “big fish.” He said spending on tax enforcement generates a favorable return on the investment.

“There’s too little emphasis on revenue as far as I’m concerned, and too much emphasis on cutting spending in terms of our budget deliberations,” he said.

The anticipated decision by Congress to limit the IRS budget to $12.1 billion for 2011 will force a debate over the 2012 budget request, because there will be a larger-than-usual gap between current funding and Obama’s request. The agency requested $13.3 billion for the fiscal year that starts Oct. 1.

The spending level will hamper the IRS, said Colleen Kelley, president of the National Treasury Employees Union, which represents IRS employees.

“This will compromise enforcement efforts, thus reducing government revenue, and serve as an obstacle to improved customer service,” she said in a statement today.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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