Under Trump, an already-depleted IRS could face deep cuts

WASHINGTON — President Donald Trump has a rocky history with the Internal Revenue Service, which he has complained audits him with unfair ferocity. Now he wants to significantly cut the tax agency's funding at a time when it has already been bleeding staff and struggling to keep up with a flood of returns before Tax Day.

The plans, revealed this week in documents associated with the White House budget outline, put Trump at odds with his Treasury secretary, Steven Mnuchin, who has argued that the IRS needs more money and a larger staff.

Another round of cuts, tax experts say, could put one of the few federal departments that pays for itself on life support.

"This is an agency that has had every last drop squeezed out of it," said Dennis J. Ventry Jr., a member of the IRS advisory council and a law professor at the University of California, Davis. "I don't know how it's going to sustain itself."

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The White House budget office has proposed a 14.1 percent cut to the IRS for the fiscal year that begins in October, reducing the agency's budget to $9.65 billion; six years ago, it stood at $12.1 billion ($13.6 billion when adjusted for inflation).

If approved, the cuts would happen when the number of audits is down and customer service complaints are up as a result of the drop in funding.

Mnuchin surprised some Republicans at his Senate confirmation hearing in January when he said that one of his priorities as Treasury secretary would be to rebuild the IRS' staff.

Promising to modernize a Treasury unit that many conservatives have threatened to abolish, Mnuchin said he was certain that Trump understood the concept of "we add people, we make money." Investing in the IRS, Mnuchin suggested, was a smart move because the agency's work ultimately paid for itself through the revenue that it brought in.

The White House, it seems, has other ideas.

The potential reduction in IRS funding is the latest example of potential division within the Trump administration's economic team, which has wrestled with how to cut taxes, invest in the military and lower the debt at the same time.

New internal data released by the agency this week underscored the pressure it is under. The number of individual tax return audits fell last year to its lowest level since 2004, and enforcement staffing levels were down by nearly 30 percent from 2010, to just below 16,000. Criminal investigations related to tax-related identity theft, money laundering, public corruption, cybercrime and terrorist financing also are on the decline, and IRS officials cited budget constraints as the reason.

"This is only going to continue that trend," Roberton C. Williams, a fellow at the nonpartisan Tax Policy Center, says of the potential cuts the agency is facing. "Audits are really a necessary function in the sense that it maintains the integrity of the system."

There is the issue of unpaid taxes, an enormous cost to America's finances. The federal budget deficit in fiscal 2016 was $587 billion, while the "tax gap" — the gulf between taxes owed and taxes paid — averaged $458 billion from 2008 from 2010, according to an analysis conducted by the IRS last year. Collecting even half that sum could make up a significant chunk of the government's budget shortfall, without increasing taxes or cutting spending.

Handicapping the agency with additional budget cuts will make matters worse, experts say, emboldening scofflaws to take their chances against an increasingly toothless tax collector. And as funding continues to fall, honest taxpayers are suffering from a lack of attention.

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The IRS Taxpayer Advocate's most recent annual report to Congress detailed how stretched the agency had become, citing the closing of dozens of walk-in assistance centers and longer waits to speak to customer service agents on the telephone.

In 2004, a taxpayer with a problem could speak to someone in less than three minutes, according to the report. Last year, it took nearly 20 minutes to navigate a maze of automation and hold times to reach someone.

Security is also a worry, with cyber threats on the rise around the world. In 2015, the IRS computer systems were hacked. As a result, personal data connected to more than 700,000 taxpayer accounts was stolen. With hackers showing increased skill and even a willingness to meddle in American elections, the agency is under pressure to keep its defenses on high alert to prevent further breaches.

But help does not appear to be on the way.

Republicans have been at odds with the IRS over accusations that the agency unfairly targeted conservative groups. John Koskinen, who was appointed commissioner in 2013 to help stabilize the agency in the aftermath of those accusations, has instead emerged as a boogeyman to its critics. He still faces calls for his impeachment over claims that he covered up information about the IRS' handling of conservative groups.

The agency's fate was a hot topic in last year's presidential campaign. As a candidate, Sen. Ted Cruz, R-Texas, suggested that the IRS should be abolished. He proposed dispatching its remaining staff members to police the country's southern border.

Trump has his own fraught history with the IRS, accusing it of unfairly auditing him year after year and citing a pending audit as a reason he would not publicly release his tax returns. While the president praised Koskinen in 2014 as "a very good man," Trump also fights hard, he has said, to keep his tax bill as low as possible.

Koskinen, who declined to be interviewed, has argued forcefully that those who would cut the IRS budget in the name of fiscal conservatism misunderstood the agency's value. At hearings around Washington, he regularly reminds members of Congress that every dollar of investment in the IRS yields $4 in revenue.

That revenue will have added importance as congressional Republicans and Trump embark on plans to cut taxes while increasing military spending and investing more in the nation's crumbling infrastructure.

Still, IRS critics are unlikely to lavish money on an agency whose mission many of them loathe, even as its workload shows no signs of letting up.

"The confluence of a 14 percent reduction, on top of a string of reductions of $900 million over the last eight years, with a promise of major tax reform later this year is a recipe for disaster at the country's most significant revenue-producing agency," said Lawrence B. Gibbs, a former IRS commissioner.

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Patricia Cohen contributed reporting.