What Happens if the US Tax System Implodes?

What Happens if the US Tax System Implodes

I wrote the book, “The Wheels Are Falling Off the Wagon at the IRS” a year ago pointing out that the IRS is in serious trouble financially.   Do we care?  Do we care if the IRS cannot collect the money to fund the federal government?  That was the question. I went on reddit twice as a result and according to people who know a lot more about this than I we had about 1,000,000 reads with 7,500 up votes and over 3,000 questions.   Those that want the federal government to fail were very excited and cheered on this perspective.  Those that had student loans, care about things like defense, social security, transportation etc. were concerned.

It’s a year later and this is what is happening now.

Seven former Internal Revenue Service commissioners dating back to the Kennedy administration have written a joint letter to the leaders of Congress’s appropriations committees urging them to reconsider proposed cuts in the budget for the agency they once ran.

They noted that the committees have proposed to reduce the IRS’s fiscal year 2015 budget of $10.9 billion by $838 million in the House version of the budget, and $470 million in the Senate version. They pointed out that the budget cuts would be the sixth year in a row for the IRS. 

“The appropriations reductions for the IRS over the last five years total $1.2 billion, more than a 17 percent cut from the IRS appropriation for 2010,” wrote the former IRS commissioners. “None of us ever experienced, nor are we aware of, any IRS appropriations reductions of this magnitude over such a prolonged period of time.”

The former IRS commissioners signing the letter include Mortimer M. Caplin, who served from 1961 to 1964, Sheldon S. Cohen (1965-1969), Lawrence B. Gibbs, (1986-1989), Fred T. Goldberg Jr. (1989-1992), Shirley D. Peterson (1992-1993), Margaret M. Richardson (1993-1997), and Charles O. Rossotti (1997-2002).

“Over the last fifty years, none of us has ever witnessed anything like what has happened to the IRS appropriations over the last five years and the impact these appropriations reductions are having on our tax system,” they wrote. “The impact on the IRS of these reductions is that the IRS has lost approximately 15,000 full-time employees through attrition over the last five years, with more losses likely in the current fiscal year unless Congress reverses the funding trend.”

They said they found the reductions in IRS appropriations difficult to understand in light of the fact that, at the same time these reductions have occurred, Congress repeatedly has passed major tax legislation, substantially increasing the IRS workload.

“The IRS personnel reductions come at a time when the IRS is stretched to the breaking point to cope with tax enforcement challenges attributable to global and domestic changes that are impacting our tax system,” wrote the former commissioners. “It is clear to each of us that the IRS appropriations reductions over the last five years materially and adversely affect the ability of the IRS to assist taxpayers who are trying to comply with their tax obligations, as well as the ability of the IRS to detect and deter taxpayers who have not complied with their tax obligations.”

I am a mediator and negotiator, speaker and writer (10 books and over 40 presentations a year), and a leadership developer today who also conducts business valuation reviews.  My mediations and negotiations are business to business, business to government and within businesses.  Most of my business to government work is with the IRS.  I am usually involved with stickier situations related to IRS issues.  I work with the parties to come a reasonable solution.

However, over the past four years of being in business for myself I see more systemic issues, lack of appropriate development by the IRS to fully develop issues which causes taxpayers to suffer, lack of training so IRS employees have to be educated on aspects of the profession and the law, and other issues at the IRS.  If this continues I am concerned about what this means to our society as voluntary compliance will continue to decline as faith is lost in the system. 

An associate of mine (two doors down from my office) went to Greece in the late 2000’s for a year to help the Greek tax authority.  He did his job exploring systemic issues and various forms to help the Greek tax system.  When he returned I asked him what he thought of the situation in Greece.  He said that Greece was going to implode.  I asked him why?  He said that the Greek citizenry had basically stopped paying most of their taxes because the system could no longer enforce actions given the lack of enforcement and faith in the tax authority. 

The last year the IRS actually was paid by congress to explore the issue of voluntary compliance was 2006.  That’s right 9 years ago.  At that time voluntary compliance was at 83%.   The IRS used to explore this issue annually.  Greece was at about 50% before they defaulted. 

With not answering half of the calls by taxpayers last filing season do you think this is increasing or decreasing voluntary compliance? I would argue voluntary compliance is dropping.  We don’t know by how much, and the IRS is continuing to be underfunded.  The latest numbers are presented above.

The question we have to ask is do we care?  If we do we need to let our legislative representatives know that we do and ask that the IRS be properly funded.  If we don’t we deserve to live with the consequences.   What do you think?

About the author

Mike Gregory is a professional speaker, an author, and a mediator. You may contact Mike directly at mg@mikegreg.com and at (651) 633-5311. Mike has written 12 books (and co-authored two others) including his latest book, The Collaboration Effect: Overcoming Your Conflicts, and The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, MBA, Qualified Mediator with the Minnesota Supreme Court]