Proposed IRS Budget Cuts Would Widen U.S. Tax Gap, Lawmaker Says

A proposed $600 million reduction in the Internal Revenue Service’s 2012 budget may cost the Treasury as much as $4 billion in forgone revenue, said a senior Democrat on the House Ways and Means Committee.

If enacted, the budget cut would “increase the deficit and widen the tax gap” because the IRS “collects between $4 and $7 for every $1 of funding,” said Representative John Lewis of Georgia, the top Democrat on the tax-writing panel’s Oversight subcommittee.

Lewis spoke at a joint meeting today of the Oversight and Select Revenue Measures subcommittees called to examine use of the U.S. tax code to influence energy policy.

The IRS had a budget allocation of $12.1 billion for fiscal 2011 and requested $13.3 billion for fiscal 2012. Earlier this month a Senate panel approved a bill funding the agency at $11.7 billion for fiscal 2012.

In July a House appropriations panel approved legislation that would fund the IRS at $11.5 billion for fiscal 2012.

Republican leaders on the panels focused on how the IRS has administered energy tax credits. Representative Charles Boustany, a Louisiana Republican and chairman of the oversight subcommittee, said the agency has done a poor job of overseeing a number of energy tax credits including the plug-in electric and alternative motor vehicle credit.

‘Claimed a Bicycle’

Even though that credit “only applied to new vehicles, IRS allowed credits when returns listed years such as 1991, 1979, and strangely enough, even 1300,” Boustany said. “They even allowed plug-in and hybrid credits for vehicles such as a ‘Cadillac Escalade,’ ‘Hummer H3,’ and ‘Harley Classic.’ One taxpayer successfully claimed a bicycle.”

J. Russell George, the Department of Treasury inspector general for tax administration, told the panel that the IRS can do more to prevent waste and fraud in overseeing energy credits.

“They do not effectively utilize the information that they have,” said George, who earlier this year issued two reports critical of the agency’s handling of the tax credits.

Lewis said budget cuts would undermine the agency’s ability to root out fraud and make it harder for the IRS to adapt to policy changes.

“Any serious discussion of energy policy and tax reform must begin with fully funding the agency,” Lewis said.

He asked a witness, Richard Byrd, commissioner of the IRS’s wage and investment division, how the proposed cut would affect the agency.

“We are going to have to dramatically reduce our staffing in a number of places, including how we look for fraud,” Byrd said.

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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