Punish the IRS -- by Giving It More Money

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June 6 (Bloomberg) -- Nothing riles up Americans quite like the taxman. And the Internal Revenue Service, unloved in the best of times, has had a rocky few weeks.

An inspector general report released May 14 said that IRS employees had been improperly scrutinizing some conservative groups seeking 501(c)(4) tax-exempt status. One group alleged that the IRS had leaked confidential information about its donors. Another report, released this week, said the agency spent some $49 million on training conferences, with the usual list of dubious team-building activities, from 2010 to 2012.

The IRS is now under investigation by no fewer than six congressional committees and faces a criminal probe from the Justice Department related to the 501(c)(4) scandal. The public overwhelmingly wants to see a special prosecutor appointed. Some Republicans, overcome by fresh anti-tax enthusiasms, want to abolish the agency.

That won’t happen, much as many Americans may fantasize about it. But there are a few reforms Congress can undertake to make the IRS more accountable.

The first concerns personnel. Several officials at the agency have been placed on leave, and Danny Werfel, the acting IRS commissioner, must determine if anyone else deserves to go in response to the recent scandals. The problems go a bit deeper, though. The agency remains decentralized, with almost 100,000 employees in offices across the country, and thus responsibility for errors tends to get diffused. Its agents often treat even innocent or confused taxpayers as cunning offenders. And its performance metrics aren’t sophisticated enough to gauge accurately how well workers are doing. Incompetent employees should be easier to fire, and the disciplinary process should be accelerated. Similar problems afflict the entire federal bureaucracy, and they won’t be easy to fix. But addressing them might mitigate some of the arrogance and callousness that the public associates with tax agents.

Purse Strings

The second reform has to do with money. Representative Hal Rogers, chairman of the House Appropriations Committee, said he would consider restricting the IRS’s budget in response to the recent scandals. “The power of the purse rests in Congress,” Rogers said. “We’re prepared to use that purse to get to the truth.”

Rogers has this dynamic precisely backward. One reason the IRS performs incompetently is that Congress keeps giving it more and more complex assignments while giving it less and less money. The agency’s budget has declined every year since 2010, even as Congress has required it to address everything from health-care reform to campaign finance to the nightmarish Foreign Account Tax Compliance Act. At the same time, the IRS workforce decreased by 9 percent from 2010 to the end of 2012, according to an inspector general’s report.

The results are clear. The IRS has a backlog of a million pieces of correspondence. Taxpayers must wait an average of 17 minutes to reach someone on the phone, and only two in three actually get through. It takes 180 days to resolve a case of identity theft. The national taxpayer advocate, Nina Olson, identified chronic underfunding as one of the most serious challenges facing the agency in her most recent report: “Budget cuts mean that the IRS will not have the trained personnel or technology required to administer the laws properly,” she wrote.

Closing Congress’s purse to the IRS, as Rogers threatens, would only exacerbate these problems while making it harder to hire competent staff. The agency’s budget should instead be increased. Olson even recommends fencing off the IRS’s funding from the rest of the federal budget to protect it from political manipulation. Before you object to this as a reward for failure, consider that every dollar cut from the IRS would mean about $7 less in taxes collected from those who are gaming the system. To spell it out: That means larger deficits.

Simplify, Simplify

Finally, and perhaps most egregiously, the complexity of the tax code -- at some 4 million words -- surpasses the power of English adjectives to describe it. People and businesses spend more than 6 billion hours a year trying to comply with it. It needs to be drastically streamlined. But remember: Your taxes aren’t complicated because the IRS wants them to be. They’re complicated because Congress made them that way.

That’s why we won’t be able to reform the IRS properly until we reform our tax system. We’ve argued for an overhaul that closes most loopholes, lowers rates and simplifies the tax code. Excessive deductions and exclusions, in particular, foster a culture in which special interests hold undue influence, IRS employees must make judgments that exceed their competence and the agency itself wields too much power.

Prospects for such a comprehensive reform look dim at the moment. Here’s hoping the latest IRS fiasco will concentrate congressional minds.

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